The Stock Market and Corporate Investment: A Test of Catering Theory

Christopher Polk, Paola Sapienza

Research output: Contribution to journalArticlepeer-review

236 Scopus citations

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 languageEnglish
Pages (from-to)187-217
JournalRev. Financ. Stud.
Volume22
DOIs
StatePublished - 2009

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