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The Stock Market and Corporate Investment: a Test of Catering Theory, Review of Financial Studies

Abstract

We test a catering theory describing how stock market mispricing might influence individual firms' investment decisions. We use discretionary accruals as our proxy for mispricing. We find a positive relation between abnormal investment and discretionary accruals; that abnormal investment is more sensitive to discretionary accruals for firms with higher R&D intensity (opaque firms) or share turnover (firms with shorter shareholder horizons); that firms with relatively high abnormal investment subsequently have relatively low (high) stock returns; and that the larger the relative price premium, the stronger the abnormal return predictability. We show that patterns in abnormal returns are stronger for firms with higher R&D intensity or higher share turnover.

Type

Article

Author(s)

Christopher Polk, Paola Sapienza

Date Published

2009

Citations

Polk, Christopher, and Paola Sapienza. 2009. The Stock Market and Corporate Investment: a Test of Catering Theory. Review of Financial Studies. 22(1): 187-217.

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