Commonality in Misvaluation, Equity Financing, and the Cross Section of Stock Returns
David Hirshleifer and
Danling Jiang
MPRA Paper from University Library of Munich, Germany
Abstract:
Behavioral theories suggest that investor misperceptions and market mispricing will be correlated across firms. This paper uses equity financing to identify comovement in returns and commonality in misvaluation. A zero-investment portfolio (UMO, Undervalued Minus Overvalued) built from repurchase and new issue stocks captures excess comovement in general stock returns relative to a set of multi-factor models. Adding UMO to the 3-factors makes the alphas insignificant for portfolios with extreme size and book-to-market, or based on M&A, convertible bond issuance, and dividend initiation, resumption, and omission. The loadings on UMO incrementally predict the cross-section of returns on portfolios as well as individual stocks. Further evidence is consistent with the UMO loading proxying for the common component of a stock's misvaluation.
Keywords: Comovement; equity financing; new issue; repurchase; systematic mispricing; return predictability (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2007-10-31, Revised 2009-07-08
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Citations: View citations in EconPapers (2)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:16134
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