Investor Demand, Firm Investment, and Capital Misallocation

89 Pages Posted: 23 Nov 2021 Last revised: 16 Nov 2023

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance; Yonsei University - School of Business

Xu Tian

University of Georgia - Terry College of Business - Department of Finance

Yufeng Wu

Ohio State University (OSU)

Mahyar Kargar

University of Illinois at Urbana-Champaign

Date Written: November 18, 2021

Abstract

Fluctuations in investor demand dramatically affect firms' valuation and access to capital. To quantify their real effects, we develop a dynamic investment model, incorporating both the demand and supply sides of capital. Strong investor demand relaxes financial constraints and facilitates equity issuance and investment, while weak demand encourages opportunistic share repurchases, crowding out investment. We estimate the model using indirect inference, matching the endogenous relationship between investor demand and firm policies. Our estimation reveals that demand fluctuations are an important driver of firm-level investment and economy-wide capital misallocation, accounting for 23.8% of dispersion in MPK and 22.3% of productivity losses.

Keywords: investor demand, firm investment, capital misallocation, structural estimation, market timing.

JEL Classification: G30, G10, G20, E22

Suggested Citation

Choi, Jaewon and Tian, Xu and Wu, Yufeng and Kargar, Mahyar, Investor Demand, Firm Investment, and Capital Misallocation (November 18, 2021). Available at SSRN: https://ssrn.com/abstract=3967753 or http://dx.doi.org/10.2139/ssrn.3967753

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://https://sites.google.com/site/jaewchoi1203

Yonsei University - School of Business ( email )

50 Yonsei-ro, Seodaemun-gu
Seoul, 120-749
Korea, Republic of (South Korea)

Xu Tian

University of Georgia - Terry College of Business - Department of Finance ( email )

620 S Lumpkin St
Athens, GA 30602
United States

HOME PAGE: http://www.xutianur.com

Yufeng Wu (Contact Author)

Ohio State University (OSU) ( email )

812 Fisher Hall
2100 Neil Ave
Columbus, OH 43210
United States
43210 (Fax)

Mahyar Kargar

University of Illinois at Urbana-Champaign ( email )

HOME PAGE: http://mahyarkargar.com

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