Real Effects of Stock Underpricing (CEPR DP8820)
Tue, 07 Feb 2012 07:51:06 GMT
Real Effects of Stock Underpricing
Author(s): Harald Hau, Sandy Lai
CEPR Discussion Paper Number 8820
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Programme Area(s): Financial Economics (FE), International Macroeconomics (IM)
Date of Publication: 01/02/2012
Keyword(s): employment, fire sales, investment, market inefficiency, mutual funds
JEL(s): G11, G14, G23
Abstract: 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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