Abstract
We test a catering theory describing how stock market mispricing might influence individual firms' investment decisions. We use discretionary accruals as our proxy for mispricing. We find a positive relation between abnormal investment and discretionary accruals; that abnormal investment is more sensitive to discretionary accruals for firms with higher R&D intensity (opaque firms) or share turnover (firms with shorter shareholder horizons); that firms with high abnormal investment subsequently have low stock returns; and that the larger the relative price premium, the stronger the abnormal return predictability. We show that patterns in abnormal returns are stronger for firms with higher R&D intensity or share turnover.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 187-217 |
| Number of pages | 31 |
| Journal | Review of Financial Studies |
| Volume | 22 |
| Issue number | 1 |
| DOIs | |
| State | Published - Jan 2009 |
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics