Real Effects of Stock Underpricing
39 Pages Posted: 1 Mar 2012
Date Written: February 2012
This paper provides evidence for a causal effect of equity prices on corporate investment and employment. We use fire sales by distressed equity funds during the 2007-2009 financial crisis to identify substantial exogenous underpricing. Firms whose stocks are most underpriced have considerably lower investment and employment than industry peers not subject to any fire sale discount. The causal effect of underpricing on investment is found to be largely concentrated on the most financially constrained firms.
Keywords: employment, fire sales, investment, market inefficiency, mutual funds
JEL Classification: G11, G14, G23
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