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Commonality in Misvaluation, Equity Financing, and the Cross Section of Stock Returns

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  • Hirshleifer, David
  • Jiang, Danling

Abstract

Behavioral theories suggest that investor misperceptions and market mispricing will be correlated across firms. This paper uses equity financing to identify comovement in returns and commonality in misvaluation. A zero-investment portfolio (UMO, Undervalued Minus Overvalued) built from repurchase and new issue stocks captures excess comovement in general stock returns relative to a set of multi-factor models. Adding UMO to the 3-factors makes the alphas insignificant for portfolios with extreme size and book-to-market, or based on M&A, convertible bond issuance, and dividend initiation, resumption, and omission. The loadings on UMO incrementally predict the cross-section of returns on portfolios as well as individual stocks. Further evidence is consistent with the UMO loading proxying for the common component of a stock's misvaluation.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16134.

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Date of creation: 31 Oct 2007
Date of revision: 08 Jul 2009
Handle: RePEc:pra:mprapa:16134

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Keywords: Comovement; equity financing; new issue; repurchase; systematic mispricing; return predictability;

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References

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Cited by:
  1. Daniel, Kent & Hirshleifer, David & Subrahmanyam, Avanidhar, 2005. "Investor Psychology and Tests of Factor Pricing Models," Working Paper Series 2005-26, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

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