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Overvalued Equity and Financing Decisions

Author

Listed:
  • Ming Dong
  • David Hirshleifer
  • Siew Hong Teoh

Abstract

We test whether and how equity overvaluation affects corporate financing decisions using an ex ante misvaluation measure that filters firm scale and growth prospects from market price. We find that equity issuance and total financing increase with equity overvaluation, but only among overvalued stocks, and that equity issuance is more sensitive than debt issuance to misvaluation. Consistent with managers catering to maintain overvaluation and with investment-scale economy effects, the sensitivity of equity issuance and total financing to misvaluation is stronger among firms with potential growth opportunities (low book-to-market, high R&D, or small size) and high share turnover. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Ming Dong & David Hirshleifer & Siew Hong Teoh, 2012. "Overvalued Equity and Financing Decisions," The Review of Financial Studies, Society for Financial Studies, vol. 25(12), pages 3645-3683.
    • Handle: RePEc:oup:rfinst:v:25:y:2012:i:12:p:3645-3683
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    File URL: http://hdl.handle.net/10.1093/rfs/hhs112
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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