Do mispricing and financial constraints matter for investment decisions?

Chih Liang Liu*, Yi Mien Lin

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This study investigates how mispricing and financing constraints affect firms’ future capital investments. We find that when the financing constraints are high, overpriced (underpriced) firms invest more (less) subsequently under previous non-optimal investments. The overpriced (underpriced) firms with precautionary motives invest significantly less subsequently when they are financially constrained. The overall evidence suggests that share mispricing, financial constraints and precautionary motives play a critical role that enables investors to less effectively monitor managers’ real decisions, thus limiting firms’ capital investments.

Original languageEnglish
Pages (from-to)5877-5892
Number of pages16
JournalApplied Economics
Volume50
Issue number54
DOIs
StatePublished - 20 Nov 2018

Keywords

  • capital investment
  • financing constraints
  • information asymmetry
  • Mispricing
  • precautionary motive

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