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

28 Pages Posted: 18 Jan 2014

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: February 2014

Abstract

We examine the impact of mispricing on corporate investments and its components: capital expenditures, research and development, 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 (February 2014). Financial Review, Vol. 49, Issue 1, pp. 89-116, 2014. Available at SSRN: https://ssrn.com/abstract=2381024 or http://dx.doi.org/10.1111/fire.12027

Mohammed Alzahrani

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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