Mispricing Firm-level Productivity

90 Pages Posted: 14 Jul 2020

See all articles by Tze Chuan 'Chewie' Ang

Tze Chuan 'Chewie' Ang

Deakin University - Department of Finance; Financial Research Network (FIRN)

FY Eric Lam

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

K.C. John Wei

Hong Kong Polytechnic University

Multiple version iconThere are 2 versions of this paper

Date Written: June 22, 2020

Abstract

This paper provides a mis-pricing-based explanation for the negative relation between firm-level productivity and stock returns. Investors appear to under-price unproductive firms and overprice productive firms. We find evidence consistent with the speculative overpricing of productive firms driven by investor sentiment and short sale constraints. Investors erroneously extrapolate past productivity growth and its associated operating performance and stock returns, despite their subsequent reversals. Such mis-pricing is perpetuated because of limits to arbitrage and is partially corrected around earnings announcements when investors are surprised by unexpected earnings news. Decomposition analysis indicates that extrapolative mis-pricing and limits to arbitrage explain most of the return predictability of firm-level productivity.

Keywords: Mispricing; Investor Sentiment; Extrapolation; Limits to Arbitrage

JEL Classification: D23; D24; G12; G14

Suggested Citation

Ang, Tze Chuan and Lam, Full Yet Eric Campbell and Wei, Kuo-Chiang (John), Mispricing Firm-level Productivity (June 22, 2020). Available at SSRN: https://ssrn.com/abstract=3632567 or http://dx.doi.org/10.2139/ssrn.3632567

Tze Chuan Ang (Contact Author)

Deakin University - Department of Finance ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia
+61 3 9244 6626 (Phone)

HOME PAGE: http://www.deakin.edu.au/profiles/tze-ang

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia,
Brisbane, Queensland 4071
Australia

HOME PAGE: http://www.firn.org.au

Full Yet Eric Campbell Lam

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central
Hong Kong
China

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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