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The stock market and corporate investment: a test of catering theory

By Christopher Polk and Paola Sapienza

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 high abnormal investment subsequently have low 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 share turnover

Topics: HG Finance
Publisher: Oxford University Press
Year: 2009
DOI identifier: 10.1093/rfs
OAI identifier: oai:eprints.lse.ac.uk:32275
Provided by: LSE Research Online
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