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Institute of Business and Economic Research
Competition Policy Center
University of California, Berkeley
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Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry
Severin Borenstein, University of California, Berkeley
Joseph Farrell, University of California, Berkeley

For research support, we are grateful to the Alfred P. Sloan Foundation, via a grant to the Industrial Technology and Productivity Project of the National Bureau of Economic Research. For helpful comments, we thank Alan Auerbach, Erwin Diewert, Judith Chevalier, Daniel McFadden, Jim Poterba, David Scharfstein and Peter Tufano, and participants in numerous seminars and conferences. T.T. Yang, David O’Neill, and Evan Rose provided outstanding research assistance. We also thank gold mining managers and government personnel who helped us understand industry issues: Earl Amey (U.S. Geological Survey), Paul Bateman (The Gold Institute), Margo Bergeson (Alta Gold), Pierre-Paul Bleau (Cambior), Mike Brown (Amax Gold), Ronald Cambre (Newmont Mining), Jerry Cooper (Asarco), Steve Dawson (Campbell Resources), Larry Drew (Hecla), Jane Engert (U.S. EPA), Tom Ferrell (Newmont Mining), Robert Gilmore (Dakota Mining), Shannon Hill (Placer Dome), Denise Jones (California Mining Association), Robbin Lee (Echo Bay), John Lutley (The Gold Institute), Greg Pelka (California State Lands), Michael Steeves (Homestake Mining), Les Van Dyke (Battle Mountain Gold), Dennis Wheeler (Coeur D’Alene), Richard Young (Barrick Gold), and Les Youngs (California Office of Mine Reclamation). Any remaining errors are the sole responsibility of the authors.

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ABSTRACT:

JEL CODES: D21, G3, L2, L72

KEYWORDS: profit function, free cash flow, gold mining, x-efficiency, rent seeking, fat

ABSTRACT: Conventional economic theory assumes that firms always minimize costs given the output they produce. News articles and interviews with executives, however, indicate that firms from time to time engage in cost-cutting exercises. One popular belief is that firms cut costs when they are in economic distress, and grow fat when they are relatively wealthy. We explore this hypothesis by studying how the stock market valuations of gold mining companies vary with gold prices. The value of a cost-minimizing, profit-maximizing firm is convex in the price of a competitively supplied input or output, but we find that the stock values of many gold mining companies are concave in the price of gold. We show that this is consistent with fat accumulation when a firm grows wealthy. We then address a number of potential alternative explanations and discuss where fat in these companies might reside.

SUGGESTED CITATION:
Severin Borenstein and Joseph Farrell, "Do Investors Forecast Fat Firms? Evidence from the Gold Mining Industry" (January 31, 2006). Competition Policy Center. Paper CPC06-056.
http://repositories.cdlib.org/iber/cpc/CPC06-056

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