Stock Market Misvaluation and Corporate Investment Ming

This paper explores whether and why misvaluation affects corporate investment by comparing tangible and intangible investments; and by using a price-based misvaluation proxy that filters out scale and earnings growth prospects. Capital, and especially R&D expenditures increase with overpricing; but only among overvalued firms. The sensitivity of R&D to misvaluation is stronger among small, high-turnover, and financially unconstrained firms. This evidence supports several implications of the misvaluation hypothesis of investment. Schulich School of Business, York University, Canada; [email protected]; (416) 736-2100 ext 77945. Merage School of Business, University of California, Irvine; [email protected]; (949) 824-9955. Merage School of Business, University of California, Irvine; [email protected]; (949) 824-9952. We thank Malcolm Baker, Alois Geyer, Ming Huang (conference discussant), Chris Polk, the Behavioral Finance Conference in Shanghai, the China International Conference in Finance in Chengdu, and seminar participants at INSEAD, McMaster University, Nanyang Tech University, Washington University, University of Iowa, University of Notre Dame, University of Roma, and University of Vienna for very helpful comments. USC FBE FINANCE SEMINAR presented by David Hirshleifer FRIDAY, September 28, 2007 10:30 am – 12:00 pm, Room: JKP-104