Equity Market Misvaluation, Financing, and Investment
Federal Reserve Board - Board of Governors
Toni M. Whited
University of Rochester - Simon School of Business; National Bureau of Economic Research
January 7, 2014
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, G35working papers series
Date posted: September 6, 2012 ; Last revised: January 10, 2014
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