Do Underpriced Firms Innovate Less?

44 Pages Posted: 21 Nov 2013

Date Written: November 20, 2013


This paper finds that stock underpricing triggers underinvestment in research. To identify underpricing, I build on previous literature on liquidity induced trading pressure to develop an exogenous proxy of mispricing. This measure is based on funds that underperform because of their over-exposure to an economically distressed industry and are forced to sell stocks of healthy firms in unrelated industries for liquidity reasons. As a consequence price drops below fundamentals and firms respond decreasing innovation activity. The main empirical explanation which is consistent with this finding is that underpriced firms prefer to divert resources from R&D into buying back their own shares at a discount, in particular when financially constrained and held by impatient shareholders.

Keywords: innovation, research, underpricing, share repurchases, mutual funds, firm policies, impatience

JEL Classification: G12, G31, G35, O31

Suggested Citation

Parise, Gianpaolo, Do Underpriced Firms Innovate Less? (November 20, 2013). Swiss Finance Institute Research Paper No. 14-12. Available at SSRN: or

Gianpaolo Parise (Contact Author)

EDHEC Business School ( email )

393 Promenade des Anglais
Nice, 06200

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