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Do Underpriced Firms Innovate Less?

Author

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  • Gianpaolo Parise

    (EDHEC Business School)

Abstract

This paper finds that stock underpricing triggers underinvestment in research. To identify underpricing, I build on previous literature on liquidity induced trading pressure to develop an exogenous proxy of mispricing. This measure is based on funds that underperform because of their over-exposure to an economically distressed industry and are forced to sell stocks of healthy firms in unrelated industries for liquidity reasons. As a consequence price drops below fundamentals and firms respond decreasing innovation activity. The main empirical explanation which is consistent with this finding is that underpriced firms prefer to divert resources from R&D into buying back their own shares at a discount, in particular when financially constrained and held by impatient shareholders.

Suggested Citation

  • Gianpaolo Parise, 2014. "Do Underpriced Firms Innovate Less?," Swiss Finance Institute Research Paper Series 14-12, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1412
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    More about this item

    Keywords

    innovation; research; underpricing; share repurchases; mutual funds; firm policies; impatience;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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