Mispricing and Firm Investment

Abstract

In my dissertation, I aim to study how stock mispricing causally affects firm investment. I first examine the association between mispricing and investment by combining 98 return anomalies into a mispricing score and show that overvalued (undervalued) firms invest more (less). I further exploit academic publication of each anomaly as an exogenous shock to mispricing. Because of anomaly return decay, firms categorized as overvalued (undervalued) post-publication are less likely to truly be mispriced, and thus their investment reduces (increases). In addition, I provide evidence for a manager catering channel where managers whose compensation depends more on stock returns conduct more mispricing-induced investment. Finally, I show that firm investment induced by overvaluation leads to higher short-term stock returns but worse long-term performance. Overall, my findings suggest that stock mispricing can distort the real economy, and that academic publication can reduce such distortion.