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Real Effects of Stock Underpricing

  • Hau, Harald
  • Lai, Sandy

This paper provides evidence for a causal effect of equity prices on corporate investment and employment. We use fire sales by distressed equity funds during the 2007-2009 financial crisis to identify substantial exogenous underpricing. Firms whose stocks are most underpriced have considerably lower investment and employment than industry peers not subject to any fire sale discount. The causal effect of underpricing on investment is found to be largely concentrated on the most financially constrained firms.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8820.

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Date of creation: Feb 2012
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Handle: RePEc:cpr:ceprdp:8820
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  1. Harald HAU & Sandy LAI, . "The Role of Equity Funds in the Financial Crisis Propagation," Swiss Finance Institute Research Paper Series 11-35, Swiss Finance Institute.
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  17. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
  18. Goyal, Vidhan K. & Yamada, Takeshi, 2002. "Asset Price Shocks, Financial Constraints, and Investment: Evidence from Japan," CEI Working Paper Series 2002-11, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  19. Cheol S. Eun & Sandy Lai & Frans A. de Roon & Zhe Zhang, 2010. "International Diversification with Factor Funds," Management Science, INFORMS, vol. 56(9), pages 1500-1518, September.
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  22. Coval, Joshua & Stafford, Erik, 2007. "Asset fire sales (and purchases) in equity markets," Journal of Financial Economics, Elsevier, vol. 86(2), pages 479-512, November.
  23. Owen Lamont & Christopher Polk & Jesus Saa-Requejo, 1997. "Financial Constraints and Stock Returns," NBER Working Papers 6210, National Bureau of Economic Research, Inc.
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