Real Effects of Stock Underpricing

Journal of Financial Economics (JFE), (Forthcoming)

Swiss Finance Institute Research Paper No. 11-59

EFA 2012 Copenhagen Meetings Paper

51 Pages Posted: 29 Nov 2011 Last revised: 6 Feb 2014

See all articles by Harald Hau

Harald Hau

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Sandy Lai

University of Hong Kong

Multiple version iconThere are 2 versions of this paper

Date Written: October 5, 2012

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.

Keywords: market inefficiency, fire sales, mutual funds, investment, employment

JEL Classification: G11, G14, G23

Suggested Citation

Hau, Harald and Lai, Sandy, Real Effects of Stock Underpricing (October 5, 2012). Journal of Financial Economics (JFE), (Forthcoming) , Swiss Finance Institute Research Paper No. 11-59, EFA 2012 Copenhagen Meetings Paper , Available at SSRN: https://ssrn.com/abstract=1965957 or http://dx.doi.org/10.2139/ssrn.1965957

Harald Hau (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Swiss Finance Institute

Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Sandy Lai

University of Hong Kong ( email )

Faculty of Business and Economics
K.K. Leung Building, Pokfulam Road
Hong Kong, Pokfulam HK
Hong Kong

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