Investor demand, firm investment, and capital misallocation

Jaewon Choi, Xu Tian, Yufeng Wu and Mahyar Kargar

Journal of Financial Economics, 2025, vol. 168, issue C

Abstract: Fluctuations in investor demand significantly affect firms’ valuation and access to capital. To quantify their real effects, we develop a dynamic investment model, incorporating both the demand and supply sides of capital. Strong investor demand relaxes financial constraints and facilitates equity issuance and investment, while weak demand encourages opportunistic share repurchases, crowding out investment. We estimate the model using indirect inference, matching the endogenous relationship between investor demand and firm policies. Our estimation reveals that demand fluctuations are important drivers of firm-level investment and economy-wide capital misallocation, accounting for 26.9% of dispersion in MPK and 23.4% of productivity losses.

Keywords: Investor demand; Firm investment; Capital misallocation; Structural estimation; Market timing (search for similar items in EconPapers)
JEL-codes: E22 G10 G20 G30 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:168:y:2025:i:c:s0304405x25000479

DOI: 10.1016/j.jfineco.2025.104039

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