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

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Author Info
Hirshleifer, David
Jiang, Danling

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Abstract

Behavioral theories suggest that investor misperceptions and market mispricing will be correlated across firms. This paper tests whether equity financing identifies comovement in returns and commonality in misvaluation. After new equity issues (repurchases), firms comove more with existing issuers (repurchasers). A zero-investment portfolio (UMO, Undervalued Minus Overvalued) built from repurchase and new issue stocks captures general comovement in returns incremental to the 4-factor model. The loadings of stocks or portfolios on UMO incrementally explain returns both in the time series and in the cross section. Further evidence suggests these loadings are proxies for the common component of a stock’s misvaluation.

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Publisher Info
Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 5618.

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Date of creation: 31 Oct 2007
Date of revision: 06 Aug 2008
Handle: RePEc:pra:mprapa:5618

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

Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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