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

The Financial Review, Forthcoming

50 Pages Posted: 20 Jun 2013

See all articles by Mohammed Alzahrani

Mohammed Alzahrani

King Fahd University of Petroleum & Minerals

Ramesh P. Rao

Oklahoma State University - Stillwater - Spears School of Business - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 18, 2013

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

Suggested Citation

Alzahrani, Mohammed and Rao, Ramesh P., Managerial Behavior and the Link between Stock Mispricing and Corporate Investments: Evidence from Market-to-Book Ratio Decomposition (June 18, 2013). The Financial Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2281303 or http://dx.doi.org/10.2139/ssrn.2281303

Mohammed Alzahrani (Contact Author)

King Fahd University of Petroleum & Minerals ( email )

Saudi Arabia
96638601626 (Phone)
96638602585 (Fax)

HOME PAGE: http://faculty.kfupm.edu.sa/FINEC/mfaraj/

Ramesh P. Rao

Oklahoma State University - Stillwater - Spears School of Business - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States
405-744-1385 (Phone)
405-744-5180 (Fax)

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