DP8820 Real Effects of Stock Underpricing

Author(s):	Harald Hau, Sandy Lai
Publication Date:	February 2012
Keyword(s):	employment, fire sales, investment, market inefficiency, mutual funds
JEL(s):	G11, G14, G23
Programme Areas:	International Macroeconomics, Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=8820

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.