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Overvalued Equity and Financing Decisions

  • Ming Dong
  • David Hirshleifer
  • Siew Hong Teoh

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.

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File URL: http://hdl.handle.net/10.1093/rfs/hhs112
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Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 25 (2012)
Issue (Month): 12 ()
Pages: 3645-3683

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Handle: RePEc:oup:rfinst:v:25:y:2012:i:12:p:3645-3683
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