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A Financing-Based Misvaluation Factor and the Cross Section of Expected Returns

  • Hirshleifer, David
  • Jiang, Danling

Behavioral theories suggest that investor misperceptions and market mispricing will be correlated across firms. We use equity and debt financing to identify common misvaluation across firms. A zero-investment portfolio (UMO, Undervalued Minus Overvalued) built from repurchase and new issue firms captures comovement in returns beyond that in some standard multifactor models, and substantially improves the Sharpe ratio of the tangency portfolio. Loadings on UMO incrementally predict the cross-section of returns on both portfolios and individual stocks, even among firms not recently involved in external financing activities. Further evidence suggests that UMO loadings proxy for the common component of a stock's misvaluation.

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File URL: http://mpra.ub.uni-muenchen.de/20636/2/MPRA_paper_20636.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20636.

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Date of creation: 31 Oct 2007
Date of revision: 10 Feb 2010
Handle: RePEc:pra:mprapa:20636
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