A Financing-Based Misvaluation Factor and the Cross Section of Expected 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. We use equity and debt financing to identify common misvaluation across firms. A zero-investment portfolio (UMO, Undervalued Minus Overvalued) built from repurchase and new issue firms captures comovement in returns beyond that in some standard multifactor models, and substantially improves the Sharpe ratio of the tangency portfolio. Loadings on UMO incrementally predict the cross-section of returns on both portfolios and individual stocks, even among firms not recently involved in external financing activities. Further evidence suggests that UMO loadings proxy for the common component of a stock's misvaluation.

Keywords: Misvaluation; financing; new issues; repurchase; factor models; market efficiency; behavioral finance (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2007-10-31, Revised 2010-02-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (42)

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Related works:
Journal Article: A Financing-Based Misvaluation Factor and the Cross-Section of Expected Returns (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:20636

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