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A Financing-Based Misvaluation Factor and the Cross-Section of Expected Returns

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  • David Hirshleifer
  • Danling Jiang

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 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. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 23 (2010)
Issue (Month): 9 ()
Pages: 3401-3436

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Handle: RePEc:oup:rfinst:v:23:y:2010:i:9:p:3401-3436

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Cited by:
  1. Zhi Da & Qianqiu Liu & Ernst Schaumburg, 2011. "Decomposing short-term return reversal," Staff Reports 513, Federal Reserve Bank of New York.
  2. Ruenzi, Stefan & Ungeheuer, Michael & Weigert, Florian, 2012. "Extreme Downside Liquidity Risk," Working Papers on Finance 1326, University of St. Gallen, School of Finance, revised Nov 2013.
  3. Hirshleifer, David & Hsu, Po-Hsuan & Li, Dongmei, 2013. "Innovative efficiency and stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 107(3), pages 632-654.
  4. Lin, Ji-Chai & Stephens, Clifford P. & Wu, YiLin, 2014. "Limited attention, share repurchases, and takeover risk," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 283-301.
  5. : Constantinos Antonio & : John A. Doukas & : Avanidhar Subrahmanyam, 2013. "Investor Sentiment and Beta Pricing," Working Papers, Warwick Business School, Finance Group wpn13-05, Warwick Business School, Finance Group.
  6. Chang, Eric C. & Luo, Yan & Ren, Jinjuan, 2013. "Pricing deviation, misvaluation comovement, and macroeconomic conditions," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5285-5299.
  7. Jiang, Danling, 2013. "The second moment matters! Cross-sectional dispersion of firm valuations and expected returns," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3974-3992.

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