Overvalued equity and financing decisions

Ming Dong, David Hirshleifer and Siew Hong Teoh

MPRA Paper from University Library of Munich, Germany

Abstract: We test whether and how equity overvaluation affects corporate financing decisions using an ex ante misvaluation measure that filters firm scale and growth prospects from market price. We find that equity issuance and total financing increase with equity overvaluation; but only among overvalued stocks; and that equity issuance is more sensitive than debt issuance to misvaluation. Consistent with managers catering to maintain overvaluation and with investment scale economy effects, the sensitivity of equity issuance and total financing to misvaluation is stronger among firms with potential growth opportunities (low book-to-market, high R&D, or small size) and high share turnover.

Keywords: financing decisions; equity issuance; overvalued equity; behavioral finance; inefficient markets (search for similar items in EconPapers)
JEL-codes: G14 G32 M41 (search for similar items in EconPapers)
Date: 2012-07-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

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Related works:
Journal Article: Overvalued Equity and Financing Decisions (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:40221

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