Stock market crash of 2008: an empirical study of the deviation of share prices from company fundamentals

ABSTRACT

The aim of this study is to investigate quantitatively whether share prices deviated from company fundamentals in the stock market crash of 2008. For this purpose, we use a large database containing the balance sheets and share prices of 7796 worldwide companies for the period 2004–2013. We develop a panel regression model using three financial indicators – dividends per share, cash flow per share and book value per share – as explanatory variables for share price. We then estimate individual company fundamentals for each year by removing the time fixed effects from the two-way fixed effects model, which we identified as the best of the panel regression models.

Based on these results, we analyse the market anomaly quantitatively using the divergence rate – the rate of the deviation of share price from a company’s fundamentals. We find that share prices on average were overvalued in the period from 2005 to 2007 and were undervalued significantly in 2008, when the global financial crisis occurred. Share prices were equivalent to the fundamentals on average in the subsequent period. Our empirical results clearly demonstrate that the worldwide stock market fluctuated excessively in the time period before and just after the global financial crisis of 2008.

KEYWORDS:

• Stock market crash
• panel regression model
• two-way fixed effects model
• company’s fundamentals
• divergence rate of share price from fundamentals

JEL CLASSIFICATION:

• G01
• G12
• G14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Two-way random effects model is unavailable since we use unbalanced panel data.

² Wooldridge (2010, p299) proposed the method that uses residuals from the pooled OLS to check the existence of serial correlation.

³ Since 7796 companies used in this study are unbalanced panel data for regression model, we obtained individual fixed effects of 6209 companies.

Additional information

Funding

This research was supported by JSPS KAKENHI Grant Number JP 17K01270.