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Managerial Behavior and the Link between Stock Mispricing and Corporate Investments: Evidence from Market-to-Book Ratio Decomposition

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  • Mohammed Alzahrani
  • Ramesh P. Rao

Abstract

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.

Suggested Citation

  • Mohammed Alzahrani & Ramesh P. Rao, 2014. "Managerial Behavior and the Link between Stock Mispricing and Corporate Investments: Evidence from Market-to-Book Ratio Decomposition," The Financial Review, Eastern Finance Association, vol. 49(1), pages 89-116, February.
    • Handle: RePEc:bla:finrev:v:49:y:2014:i:1:p:89-116
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    File URL: http://hdl.handle.net/10.1111/fire.12027
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    Cited by:

    1. Barka, Zeineb & Hamza, Taher & Mrad, Senda, 2023. "Corporate ESG scores and equity market misvaluation: Toward ethical investor behavior," Economic Modelling, Elsevier, vol. 127(C).

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