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Managerial Behavior and the Link between Stock Mispricing and Corporate Investments: Evidence from Market‐to‐Book Ratio Decomposition
Author(s) -
Alzahrani Mohammed,
Rao Ramesh P.
Publication year - 2014
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12027
Subject(s) - shareholder , business , monetary economics , stock (firearms) , investment (military) , stock market , capital market , economics , finance , corporate governance , mechanical engineering , paleontology , horse , politics , political science , law , engineering , biology
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.