Abstract

http://ssrn.com/abstract=2142209
 
 

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Equity Market Misvaluation, Financing, and Investment


Missaka Warusawitharana


Federal Reserve Board - Board of Governors

Toni M. Whited


University of Rochester - Simon Business School; National Bureau of Economic Research

January 7, 2014


Abstract:     
We quantify how much nonfundamental movements in stock prices affect firm decisions. We estimate a dynamic investment model in which firms can 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 either investment, dividends, or net cash. The model fits a broad set of data moments in large heterogeneous samples and across industries. Our estimation results imply that firms respond to misvaluation by adjusting financing more than investment. Managers' rational responses to misvaluation increase shareholder value by up to 3%.

Number of Pages in PDF File: 54

Keywords: equity misvaluation, financing, investment

JEL Classification: G31, G32, G35

working papers series


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Date posted: September 6, 2012 ; Last revised: January 10, 2014

Suggested Citation

Warusawitharana, Missaka and Whited, Toni M., Equity Market Misvaluation, Financing, and Investment (January 7, 2014). Available at SSRN: http://ssrn.com/abstract=2142209 or http://dx.doi.org/10.2139/ssrn.2142209

Contact Information

Missaka Warusawitharana
Federal Reserve Board - Board of Governors ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
Toni M. Whited (Contact Author)
University of Rochester - Simon Business School ( email )
Rochester, NY 14627
United States
HOME PAGE: http://toni.marginalq.com

National Bureau of Economic Research ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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