WSEAS Transactions on Systems
Print ISSN: 1109-2777, E-ISSN: 2224-2678
Volume 12, 2013
The Effect of Stock Market Mispricing on Investment — Evidence from China
Authors: , ,
Abstract: Using a large panel of Chinese listed firms, we introduce market timing theory and investigate if mispricing in the stock market has an impact on firm-level investment. The article discusses the relationship between equity mispricing and equity dependence. A significantly positive relation is documented between investment and the proxies for mispricing, suggesting that overpriced (underpriced) firms tend to overinvest (under-invest).Furthermore, we find that based on financing constrains index equity-dependent firms which display a more pronounced sensitivity of investment to stock misevaluation than do non-equity-dependent firms. Our findings show that mispricing in Chinese capital markets may have significant influence on the real economy, and the influence works though an equity-financing channel.