Equity Market Misvaluation, Financing, and Investment
Board of Governors of the Federal Reserve System
Toni M. Whited
University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research
November 6, 2014
We estimate a dynamic investment model in which firms 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 investment, dividends, or net cash. The model fits a broad set of data moments in large heterogeneous samples and across industries. Our parameter estimates imply that misvaluation induces larger changes in financial policies than investment. The investment responses are strongest for small firms but nonetheless modest. Managers' rational responses to misvaluation increase shareholder value by up to 3%.
Number of Pages in PDF File: 60
Keywords: equity misvaluation, financing, investment
JEL Classification: G31, G32, G35
Date posted: September 6, 2012 ; Last revised: November 7, 2014
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