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Title: Real Effects of Stock Underpricing

Author(s): Harald Hau and Sandy Lai

Publication Date: February 2012

Keyword(s): employment, fire sales, investment, market inefficiency and mutual funds

Programme Area(s): Financial Economics and International Macroeconomics

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.

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Bibliographic Reference

Hau, H and Lai, S. 2012. 'Real Effects of Stock Underpricing'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8820