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Equity market misvaluation, financing, and investment

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  • Toni Whited

    (University of Rochester)

  • Missaka Warusawitharana

    (Board of Governors of the Federal Reserv)

Abstract

We quantify how much nonfundamental movements in stock prices affect firm decisions. We estimate a dynamic investment model in which firms can finance with equity, cash, or debt. Misvaluation affects equity values, and firms optimally issue and repurchase overvalued and undervalued shares. The funds owing to and from these activities come from either investment, dividends, or net cash. The model ts a broad set of data moments in large heterogeneous samples and across industries. Our estimation results imply that firms respond to misvaluation by adjusting financing more than investment. Managers' rational responses to misvaluation increase shareholder value by up to 3%.

Suggested Citation

  • Toni Whited & Missaka Warusawitharana, 2014. "Equity market misvaluation, financing, and investment," 2014 Meeting Papers 95, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:95
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