A Financing-Based Misvaluation Factor and the Cross Section of Expected Returns
59 Pages
Posted: 20 Mar 2007
Last revised: 22 Jun 2011
University of California, Irvine - Paul Merage School of Business; NBER
College of Business, Stony Brook University; School of Economics and Management, Southwest Jiaotong University
Date Written: February 10, 2010
Abstract
Behavioral theories suggest that investor misperceptions and market mispricing will be correlated across firms. We use equity and debt financing to identify common misvaluation across firms. A zero-investment portfolio (UMO, Undervalued Minus Overvalued) built from repurchase and new issue firms captures comovement in returns beyond that in some standard multifactor models, and substantially improves the Sharpe ratio of the tangency portfolio. Loadings on UMO incrementally predict the cross-section of returns on both portfolios and individual stocks, even among firms not recently involved in external financing activities. Further evidence suggests that UMO loadings proxy for the common component of a stock's misvaluation.
Keywords: Misvaluation, financing, new issues, repurchase, factor models, market efficiency, behavioral finance
JEL Classification: G12, G14
Suggested Citation:
Suggested Citation
Hirshleifer, David A. and Jiang, Danling, A Financing-Based Misvaluation Factor and the Cross Section of Expected Returns (February 10, 2010). Review of Financial Studies, Vol. 23, No. 9, pp. 3401-3436, 2010
; AFA 2008 New Orleans Meetings Paper; WFA 2009 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=972695
