Do Underpriced Firms Innovate Less?

Gianpaolo Parise
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Gianpaolo Parise: EDHEC Business School

No 14-12, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper finds that stock underpricing triggers underinvestment in research. To identify underpricing, I build on previous literature on liquidity induced trading pressure to develop an exogenous proxy of mispricing. This measure is based on funds that underperform because of their over-exposure to an economically distressed industry and are forced to sell stocks of healthy firms in unrelated industries for liquidity reasons. As a consequence price drops below fundamentals and firms respond decreasing innovation activity. The main empirical explanation which is consistent with this finding is that underpriced firms prefer to divert resources from R&D into buying back their own shares at a discount, in particular when financially constrained and held by impatient shareholders.

Keywords: innovation; research; underpricing; share repurchases; mutual funds; firm policies; impatience (search for similar items in EconPapers)
JEL-codes: G12 G31 G35 O31 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014-01
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1412

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