Managerial Behavior and the Link between Stock Mispricing and Corporate Investments: Evidence from Market-to-Book Ratio Decomposition

Abstract

We examine the impact of mispricing on capital expenditures, R&D, acquisitions, and asset sales. By decomposing the market-to-book ratio into mispricing and growth components, we show that corporate investments are linked to mispricing through market-timing and catering, after controlling for growth and financial slack. This investment-mispricing link is more pronounced in financially constrained firms and in firms with short-horizon shareholders. Overall, our study indicates that the sensitivity of investments to mispricing is a function of the nature of mispricing, the type of investment, and the firm’s characteristics.

Keywords: Stock mispricing, financial constraints, investment horizon, corporate investments

JEL Classification: G31, G32, G34, D92