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Investor demand, firm investment, and capital misallocation

Author

Listed:
  • Choi, Jaewon
  • Tian, Xu
  • Wu, Yufeng
  • Kargar, Mahyar

Abstract

Fluctuations in investor demand significantly affect firms’ valuation and access to capital. To quantify their real effects, we develop a dynamic investment model, incorporating both the demand and supply sides of capital. Strong investor demand relaxes financial constraints and facilitates equity issuance and investment, while weak demand encourages opportunistic share repurchases, crowding out investment. We estimate the model using indirect inference, matching the endogenous relationship between investor demand and firm policies. Our estimation reveals that demand fluctuations are important drivers of firm-level investment and economy-wide capital misallocation, accounting for 26.9% of dispersion in MPK and 23.4% of productivity losses.

Suggested Citation

  • Choi, Jaewon & Tian, Xu & Wu, Yufeng & Kargar, Mahyar, 2025. "Investor demand, firm investment, and capital misallocation," Journal of Financial Economics, Elsevier, vol. 168(C).
    • Handle: RePEc:eee:jfinec:v:168:y:2025:i:c:s0304405x25000479
    DOI: 10.1016/j.jfineco.2025.104039
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    More about this item

    Keywords

    Investor demand; Firm investment; Capital misallocation; Structural estimation; Market timing;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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