Equity Market Misvaluation, Financing, and Investment

Missaka Warusawitharana and Toni Whited

The Review of Financial Studies, 2016, vol. 29, issue 3, 603-654

Abstract: We estimate a dynamic investment model in which firms finance with equity, cash, or debt. Misvaluation affects equity values, and firms optimally issue and repurchase overvalued and undervalued shares. The funds flowing to and from these activities come from investment, dividends, or net cash. The model fits a broad set of data moments in large heterogeneous samples and across industries. Our parameter estimates imply that misvaluation induces larger changes in financial policies than investment. The investment responses are strongest for small firms but nonetheless modest. Managers' rational responses to misvaluation increase shareholder value by up to 4%. Received January 7, 2014; accepted September 30, 2015 by Editor Leonid Kogan.

Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (42)

Downloads: (external link)
http://hdl.handle.net/10.1093/rfs/hhv066 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Equity market misvaluation, financing, and investment (2014)
Working Paper: Equity market misvaluation, financing, and investment (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:rfinst:v:29:y:2016:i:3:p:603-654.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Review of Financial Studies is currently edited by Itay Goldstein

More articles in The Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().