Hostname: page-component-586b7cd67f-tf8b9 Total loading time: 0 Render date: 2024-11-20T10:47:38.290Z Has data issue: false hasContentIssue false
  • English
  • Français

Misvaluation and Corporate Inventiveness

Published online by Cambridge University Press:  24 August 2020

Ming Dong Open the ORCID record for Ming Dong [Opens in a new window] ,
David Hirshleifer Open the ORCID record for David Hirshleifer [Opens in a new window]  and
Siew Hong Teoh Open the ORCID record for Siew Hong Teoh [Opens in a new window]
Ming Dong
Affiliation:
York University Schulich School of [email protected]
David Hirshleifer*
Affiliation:
University of California at Irvine Merage School of Business
Siew Hong Teoh
Affiliation:
University of California at Irvine Merage School of [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We test how market overvaluation affects corporate innovation. Estimated stock overvaluation is strongly associated with measures of innovative inventiveness (novelty, originality, and scope), as well as research and development (R&D) and innovative output (patent and citation counts). Misvaluation affects R&D more via a nonequity channel than via equity issuance. The sensitivity of innovative inventiveness to misvaluation increases with share turnover and overvaluation. The frequency of exceptionally high innovative inputs/outputs increases with overvaluation. This evidence suggests that market overvaluation may generate social value by increasing innovative output and encouraging firms to engage in “moon shots.”

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 8 , December 2021 , pp. 2605 - 2633
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

For helpful comments, we thank Malcolm Baker, Itzhak Ben-David, Justin Birru, Tony Cookson, Richard Crowley, Peter DeMarzo, Robin Greenwood, Jarrad Harford (the editor), Michael Hirshleifer, Ming Huang, Mark Kamstra, Byoung Kang, Jung-Wook Kim, Dongmei Li, Chris Polk, Eric So, Xuan Tian (the referee), Sheridan Titman, John Wei, Mike Weisbach, and Zhaoxia Xu; conference discussants, Tao Chen, Henrik Cronqvist, Jody Grewal, Adrien Matray, Anywhere Sichochi, and Noah Stoffman; and conference and seminar participants at the 2015 China International Conference in Finance, 2017 Financial Accounting and Reporting Section meeting, 2017 National Bureau of Economic Research (NBER) Behavioral Finance meeting, 2017 Ohio State University Alumni conference, 2018 American Finance Association conference, 2018 Harvard Business School (HBS) Information, Markets, and Organizations (IMO) conference, City University of London, Hong Kong Polytechnic University, INSEAD, Laval University, McMaster University, Nanyang Technological University, National University of Singapore, Singapore Management University, University of Glasgow, University of Iowa, University of Notre Dame, University of Roma, University of Southern California, University of Texas Austin, University of Vienna, and Washington University. We thank Zheng Sun for help with the mutual fund flow measure. We thank the National Center for the Middle Market (USA) and the Social Science and Humanities Research Council of Canada (SSHRC) for financial support.

References

Acharya, V., and Xu, Z.. “Financial Dependence and Innovation: The Case of Public versus Private Firms.” Journal of Financial Economics, 124 (2017), 223–243.CrossRefGoogle Scholar
Ali, U., and Hirshleifer, D. A.. “Opportunism as a Managerial Trait: Predicting Insider Trading Profits and Misconduct.” Journal of Financial Economics, 126 (2017), 490–515.CrossRefGoogle Scholar
Alti, A., and Tetlock, P. C.. “Biased Beliefs, Asset Prices, and Investment: A Structural Approach.” Journal of Finance, 69 (2014), 325–361.CrossRefGoogle Scholar
Badertscher, B.; Shanthikumar, D.; and Teoh, S. H.. “Private Firm Investment and Public Peer Misvaluation.” Accounting Review, 94 (2019), 31–60.CrossRefGoogle Scholar
Baker, M.; Pan, X.; and Wurgler, J.. “A Reference Point Theory of Mergers and Acquisitions.” Journal of Financial Economics, 106 (2012), 49–71.CrossRefGoogle Scholar
Baker, M., and Stein, J. C.. “Market Liquidity as a Sentiment Indicator.” Journal of Financial Markets, 7 (2004), 271–299.CrossRefGoogle Scholar
Baker, M.; Stein, J. C.; and Wurgler, J.. “When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms.” Quarterly Journal of Economics, 118 (2003), 969–1005.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “The Equity Share in New Issues and Aggregate Stock Returns.” Journal of Finance, 55 (2000), 2219–2257.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Market Timing and Capital Structure.” Journal of Finance, 57 (2002), 1–32.CrossRefGoogle Scholar
Barro, R. J. “The Stock Market and Investment.” Review of Financial Studies, 3 (1990), 115–131.CrossRefGoogle Scholar
Basalla, G. The Evolution of Technology. Cambridge, UK: Cambridge University Press (1988).Google Scholar
Birru, J. “Confusion of Confusions: A Test of the Disposition Effect and Momentum.” Review of Financial Studies, 28 (2015), 1849–1873.CrossRefGoogle Scholar
Blanchard, O.; Rhee, C.; and Summers, L.. “The Stock Market, Profit, and Investment.” Quarterly Journal of Economics, 108 (1993), 115–136.CrossRefGoogle Scholar
Camanho, N. “The Effects of Fund Flows on Corporate Investment: A Catering View.” Working Paper, Catolica Lisbon School of Business and Economics (2015).Google Scholar
Campello, M., and Graham, J. R.. “Do Stock Prices Influence Corporate Decisions? Evidence from the Technology Bubble.” Journal of Financial Economics, 107 (2013), 89–110.CrossRefGoogle Scholar
Chan, L. K. C.; Lakonishok, J.; and Sougiannis, T.. “The Stock Market Valuation of Research and Development Expenditures.” Journal of Finance, 56 (2001), 2431–2456.CrossRefGoogle Scholar
Chirinko, R. S., and Schaller, H.. “Business Fixed Investment and ‘Bubbles’: The Japanese Case.” American Economic Review, 91 (2001), 663–680.CrossRefGoogle Scholar
Chirinko, R. S., and Schaller, H.. “Do Bubbles Lead to Overinvestment? A Revealed Preference Approach.” In New Perspectives on Asset Price Bubbles: Theory, Evidence, and Policy, Evanoff, D. D., Kaufman, G. G., and Malliaris, A. G., eds. New York, NY: Oxford University Press, (2012), 433–453.CrossRefGoogle Scholar
Cornell, B. “The Tesla Run-Up: A Follow-Up with Investment Implications.” Journal of Portfolio Management, 43 (2016), 1–4.CrossRefGoogle Scholar
Cornell, B., and Damodaran, A.. “Tesla: Analysis of a Run-Up.” Journal of Portfolio Management, 41 (2014), 139–151.CrossRefGoogle Scholar
Coval, J., and Stafford, E.. “Asset Fire Sales (and Purchases) in Equity Markets.” Journal of Financial Economics, 86 (2007), 479–512.CrossRefGoogle Scholar
Custodio, C.; Ferreira, M. A.; and Matos, P. P.. “Do General Managerial Skills Spur Innovation?” Working Paper, Darden Business School (2013).CrossRefGoogle Scholar
DeAngelo, H.; DeAngelo, L.; and Stulz, R. M.. “Seasoned Equity Offerings, Market Timing, and the Corporate Lifecycle.” Journal of Financial Economics, 95 (2010), 275–295.CrossRefGoogle Scholar
Dessaint, O.; Foucault, T.; Fresard, L.; and Matray, A.. “Noisy Stock Prices and Corporate Investment.” Review of Financial Studies, 32 (2019), 2625–2672.CrossRefGoogle Scholar
D’Mello, R., and Shroff, P. K.. “Equity Undervaluation and Decisions Related to Repurchase Tender Offers: An Empirical Investigation.” Journal of Finance, 55 (2000), 2399–2424.CrossRefGoogle Scholar
Dong, M.; Hirshleifer, D. A.; Richardson, S.; and Teoh, S. H.. “Does Investor Misvaluation Drive the Takeover Market?” Journal of Finance, 61 (2006), 725–762.CrossRefGoogle Scholar
Dong, M.; Hirshleifer, D. A.; and Teoh, S. H.. “Overvalued Equity and Financing Decisions.” Review of Financial Studies, 25 (2012), 3645–3683.CrossRefGoogle Scholar
Eberhart, A. C.; Maxwell, W. F.; and Siddique, A. R.. “An Examination of Long‐Term Abnormal Stock Returns and Operating Performance Following R&D Increases.” Journal of Finance, 59 (2004), 623–650.CrossRefGoogle Scholar
Edmans, A.; Goldstein, I.; and Jiang, W.. “The Real Effects of Financial Markets: The Impact of Prices on Takeovers.” Journal of Finance, 67 (2012), 933–971.CrossRefGoogle Scholar
George, T. J.; Hwang, C.-Y.; and Li, Y.. “The 52-Week High, Q Theory and the Cross Section of Stock Returns.” Journal of Financial Economics, 128 (2018), 148–163.CrossRefGoogle Scholar
Gilchrist, S.; Himmelberg, C. P.; and Huberman, G.. “Do Stock Price Bubbles Influence Corporate Investment?” Journal of Monetary Economics, 52 (2005), 805–827.CrossRefGoogle Scholar
Gornall, W., and Strebulaev, I.. “Squaring Venture Capital Valuations with Reality.” Working Paper, University of British Columbia and Stanford University (2017).CrossRefGoogle Scholar
Graham, J. R., and Harvey, C. R.. “The Theory and Practice of Corporate Finance: Evidence from the Field.” Journal of Financial Economics, 61 (2001), 187–243.CrossRefGoogle Scholar
Gross, D. Pop! Why Bubbles Are Great for the Economy. New York, NY: HarperCollins (2009).Google Scholar
Hall, B. H.; Jaffe, A; and Trajtenberg, M.. “The NBER Patent Citations Data File: Lessons, Insights and Methodological Tools.” Working Paper 8498, National Bureau of Economic Research (2001).Google Scholar
Hall, B. H.; Jaffe, A.; and Trajtenberg, M.. “Market Value and Patent Citations.” RAND Journal of Economics, 36 (2005), 16–38.Google Scholar
Hau, H., and Lai, S.. “Real Effects of Stock Underpricing.” Journal of Financial Economics, 108 (2013), 392–408.CrossRefGoogle Scholar
Henderson, B. J.; Jegadeesh, N.; and Weisbach, M. S.. “World Markets for Raising New Capital.” Journal of Financial Economics, 82 (2006), 63–101.CrossRefGoogle Scholar
Hirshleifer, D. A.; Hsu, P.-H.; and Li, D.. “Innovative Originality, Profitability, and Stock Returns.” Review of Financial Studies, 31 (2018), 2553–2605.CrossRefGoogle Scholar
Hirshleifer, D. A.; Low, A.; and Teoh, S. H.. “Are Overconfident CEOs Better Innovators?” Journal of Finance, 67 (2012), 1457–1498.CrossRefGoogle Scholar
Hirshleifer, D. A.; Subrahmanyam, A.; and Titman, S.. “Feedback and the Success of Irrational Investors.” Journal of Financial Economics, 81 (2006), 311–338.CrossRefGoogle Scholar
Huang, R., and Ritter, J. R.. “Corporate Cash Shortfalls and Financing Decisions.” Working Paper, University of Florida (2019).Google Scholar
Jeng, L. A.; Metrick, A.; and Zeckhauser, R.. “Estimating the Returns to Insider Trading: A Performance-Evaluation Perspective.” Review of Economics and Statistics, 85 (2003), 453–471.CrossRefGoogle Scholar
Jensen, M. C. “Agency Costs of Overvalued Equity.” Financial Management, 34 (2005), 5–19.CrossRefGoogle Scholar
Kaplan, S. N., and Zingales, L.. “Do Financial Constraints Explain Why Investment Is Correlated with Cash Flow?” Quarterly Journal of Economics, 112 (1997), 169–216.CrossRefGoogle Scholar
Keynes, J. M. “An Economic Analysis of Unemployment.” In Collected Writings, Vol. XIII. London, UK: Macmillan (1931), 343–367.Google Scholar
Kogan, L.; Papanikolaou, D.; Seru, A.; and Stoffman, N.. “Technological Innovation, Resource Allocation, and Growth.” Quarterly Journal of Economics, 132 (2017), 665–712.CrossRefGoogle Scholar
Lakonishok, J., and Lee, I.. “Are Insider Trades Informative?” Review of Financial Studies, 14 (2001), 79–111.CrossRefGoogle Scholar
LaPlante, M., and Muscarella, C. J.. “Do Institutions Receive Comparable Execution in the NYSE and Nasdaq Markets? A Transaction Study of Block Trades.” Journal of Financial Economics, 45 (1997), 97–134.CrossRefGoogle Scholar
Lee, C. M. C., and Swaminathan, B.. “Price Momentum and Trading Volume.” Journal of Finance, 55 (2000), 2017–2069.CrossRefGoogle Scholar
Lerner, J.; Sørensen, M.; and Strömberg, P.. “Private Equity and Long-Run Investment: The Case of Innovation.” Journal of Finance, 66 (2011), 445–477.CrossRefGoogle Scholar
Lev, B., and Sougiannis, T.. “The Capitalization, Amortization, and Value-Relevance of R&D.” Journal of Accounting and Economics, 21 (1996), 107–138.CrossRefGoogle Scholar
Li, D. “Financial Constraints, R&D Investment, and Stock Returns.” Review of Financial Studies, 24 (2011), 2974–3007.CrossRefGoogle Scholar
Li, J. “Fund Flows, Slow-Moving Liquidity Provision, and Common Factors in Stock Returns.” Working Paper, Stanford University (2019).Google Scholar
Li, J., and Yu, J.. “Investor Attention, Psychological Anchors, and Stock Return Predictability.” Journal of Financial Economics, 104 (2012), 401–419.CrossRefGoogle Scholar
Lou, X., and Wang, Y. A.. “Flow-Induced Trading Pressure and Corporate Investment.” Journal of Financial and Quantitative Analysis, 53 (2018), 171–201.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “The New Issues Puzzle.” Journal of Finance, 50 (1995), 23–52.CrossRefGoogle Scholar
Ma, Y. “Non-Financial Firms as Cross-Market Arbitrageurs.” Journal of Finance, 74 (2019), 3041–3087.CrossRefGoogle Scholar
Morck, R.; Shleifer, A.; and Vishny, R. W.. “The Stock Market and Investment: Is the Market a Sideshow?” Brookings Papers on Economic Activity (1990), 157–202.CrossRefGoogle Scholar
Moskowitz, T. J., and Grinblatt, M.. “Do Industries Explain Momentum?” Journal of Finance, 54 (1999), 1249–1290.CrossRefGoogle Scholar
Ohlson, J. “Earnings, Book Values, and Dividends in Equity Valuation.” Contemporary Accounting Research, 11 (1995), 661–687.CrossRefGoogle Scholar
Parise, G. “Do Underpriced Firms Innovate Less?” Working Paper, Swiss Finance Institute (2013).CrossRefGoogle Scholar
Phillips, G. M., and Zhdanov, A.. “R&D and the Incentives from Merger and Acquisition Activity.” Review of Financial Studies, 26 (2013), 34–78.CrossRefGoogle Scholar
Polk, C., and Sapienza, P.. “The Stock Market and Corporate Investment: A Test of Catering Theory.” Review of Financial Studies, 22 (2009), 187–217.CrossRefGoogle Scholar
Ritter, J. R. “The Long-Run Performance of Initial Public Offerings.” Journal of Finance, 46 (1991), 3–27.CrossRefGoogle Scholar
Romer, P. M. “Endogenous Technological Change.” Journal of Political Economy, 98 (1990), S71–S102.CrossRefGoogle Scholar
Schumpeter, J. A. The Theory of Economic Development. Cambridge, MA: Harvard University Press (1934).Google Scholar
Seru, A. “Firm Boundaries Matter: Evidence from Conglomerates and R&D Activity.” Journal of Financial Economics, 111 (2014), 381–405.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “Stock Market Driven Acquisitions.” Journal of Financial Economics, 55 (2003), 2219–2258.Google Scholar
Singh, J., and Fleming, L.. “Lone Inventors as Sources of Breakthroughs: Myth or Reality?” Management Science, 56 (2010), 41–56.CrossRefGoogle Scholar
Sorkin, A. R. “How Valuable Is a Unicorn? Maybe Not as Much as It Claims to Be.” New York Times (Oct. 16, 2017), available at https://www.nytimes.com/2017/10/16/business/how-valuable-is-a-unicorn-maybe-not-as-much-as-it-claims-to-be.html.Google Scholar
Stein, J. “Rational Capital Budgeting in an Irrational World.” Journal of Business, 69 (1996), 429–455.CrossRefGoogle Scholar
Teoh, S. H.; Welch, I.; and Wong, T. J.. “Earnings Management and the Long-Term Market Performance of Initial Public Offerings.” Journal of Finance, 53 (1998a), 1935–1974.CrossRefGoogle Scholar
Teoh, S. H.; Welch, I.; and Wong, T. J.. “Earnings Management and the Underperformance of Seasoned Equity Offerings.” Journal of Financial Economics, 50 (1998b), 63–99.CrossRefGoogle Scholar
Teoh, S. H.; Wong, T. J.; and Rao, G.. “Are Accruals during an Initial Public Offering Opportunistic?” Review of Accounting Studies, 3 (1998), 175–208.CrossRefGoogle Scholar
Tian, X., and Wang, T.. “Tolerance for Failure and Corporate Innovation.” Review of Financial Studies, 27 (2014), 211–255.CrossRefGoogle Scholar
Tobin, J. “A General Equilibrium Approach to Monetary Theory.” Journal of Money, Credit, and Banking, 1 (1969), 15–29.CrossRefGoogle Scholar
Trajtenberg, M.; Henderson, R.; and Jaffe, A.. “University versus Corporate Patents: A Window on the Basicness of Invention.” Economics of Innovation and New Technology, 5 (1997), 19–50.CrossRefGoogle Scholar
Wardlaw, M. “Measuring Mutual Fund Flow Pressure as Shock to Stock Returns.” Journal of Finance, forthcoming (2020).CrossRefGoogle Scholar
Warusawitharana, M., and Whited, T. M.. “Equity Market Misvaluation, Financing, and Investment.” Review of Financial Studies, 29 (2016), 603–654.Google Scholar
Weitzman, M. L. “Recombinant Growth.” Quarterly Journal of Economics, 113 (1998), 331–360.CrossRefGoogle Scholar
Welch, I., and Wessels, D.. “The Cross-Sectional Determinants of Corporate Capital Expenditures.” Schmalenbach Business Review, 52 (2000), 103–136.CrossRefGoogle Scholar
Supplementary material: PDF

Dong et al. supplementary material

Dong et al. supplementary material

Download Dong et al. supplementary material(PDF)
PDF 653.7 KB