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Do mispricing and financial constraints matter for investment decisions?

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  • Chih-Liang Liu
  • Yi-Mien Lin

Abstract

This study investigates how mispricing and financing constraints affect firms’ future capital investments. We find that when the financing constraints are high, overpriced (underpriced) firms invest more (less) subsequently under previous non-optimal investments. The overpriced (underpriced) firms with precautionary motives invest significantly less subsequently when they are financially constrained. The overall evidence suggests that share mispricing, financial constraints and precautionary motives play a critical role that enables investors to less effectively monitor managers’ real decisions, thus limiting firms’ capital investments.

Suggested Citation

  • Chih-Liang Liu & Yi-Mien Lin, 2018. "Do mispricing and financial constraints matter for investment decisions?," Applied Economics, Taylor & Francis Journals, vol. 50(54), pages 5877-5892, November.
  • Handle: RePEc:taf:applec:v:50:y:2018:i:54:p:5877-5892
    DOI: 10.1080/00036846.2018.1488071
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