Overvalued Equity and Financing Decisions

60 Pages Posted: 30 Jun 2011 Last revised: 26 Jul 2012

See all articles by Ming Dong

Ming Dong

York University - Schulich School of Business

David A. Hirshleifer

Marshall School of Business, USC; National Bureau of Economic Research (NBER)

Siew Hong Teoh

UCLA Anderson School of Management

Date Written: July 12, 2012

Abstract

We test whether and how equity overvaluation affects corporate financing decisions using an ex ante misvaluation measure that filters firm scale and growth prospects from market price. We find that equity issuance and total financing increase with equity overvaluation; but only among overvalued stocks; and that equity issuance is more sensitive than debt issuance to misvaluation. Consistent with managers catering to maintain overvaluation and with investment scale economy effects, the sensitivity of equity issuance and total financing to misvaluation is stronger among firms with potential growth opportunities (low book-to-market, high R&D, or small size) and high share turnover.

Keywords: financing decisions, equity issuance, overvalued equity, behavioral finance, market efficiency

JEL Classification: G14, G32, M41

Suggested Citation

Dong, Ming and Hirshleifer, David A. and Teoh, Siew Hong, Overvalued Equity and Financing Decisions (July 12, 2012). Available at SSRN: https://ssrn.com/abstract=1874726 or http://dx.doi.org/10.2139/ssrn.1874726

Ming Dong

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext. 77945 (Phone)
416-736-5687 (Fax)

David A. Hirshleifer (Contact Author)

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.uci.edu/dhirshle/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Siew Hong Teoh

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/faculty-and-research/accounting/faculty/teoh

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