Articlegreen2015

Equity Market Misvaluation, Financing, and Investment

Missaka Warusawitharana · Toni M. Whited

105 citations0/0 files storedReview of Financial Studies

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Analysis and Corporate Governance

Abstract

We quantify how much nonfundamental movements in stock prices affect firm decisions. We estimate a dynamic investment model in which firms can finance with equity, cash, or debt. Misvaluation affects equity values, and firms optimally issue and repurchase overvalued and undervalued shares. The funds owing to and from these activities come from either investment, dividends, or net cash. The model ts a broad set of data moments in large heterogeneous samples and across industries. Our estimation results imply that firms respond to misvaluation by adjusting financing more than investment. Managers' rational responses to misvaluation increase shareholder value by up to 3%.

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References

1999Corporate Ownership Around the World 1985Continuous Auctions and Insider Trading 2001The theory and practice of corporate finance: evidence from the field 2010New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index 1980Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?2002Market Timing and Capital Structure 2006Financial Constraints Risk 1995The New Issues Puzzle

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