Equity market misvaluation, financing, and investment

Toni Whited and Missaka Warusawitharana
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Missaka Warusawitharana: Board of Governors of the Federal Reserv

No 95, 2014 Meeting Papers from Society for Economic Dynamics

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%.

Date: 2014
New Economics Papers: this item is included in nep-bec and nep-dge
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Related works:
Journal Article: Equity Market Misvaluation, Financing, and Investment (2016)
Working Paper: Equity market misvaluation, financing, and investment (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:95

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