DOES STOCK MISPRICING AFFECT THE CORPORATE INVESTMENT DECISIONS? EVIDENCE FROM CATERING EFFECT

Muhammad Usman,Humera Imran,Sana Saleem,Faiq Mahmood

doi:10.24212/2179-3565.2018v9i1p43-54

Abstract

Current study finds out the effect of stock mispricing, through catering effect, on corporate investment decisions by taking the sample of firms listed on Pakistan Stock Exchange during the period of 2007-2014. This study uses the methodology of Rhodes-Kropf et al (2005) to measure the stock mispricing who used market to book decomposition methodology to find out different components of mispricing and relate it to corporate investment activity that is measured by capital expenditures. Stockholder investment horizon is measured by share turnover ratio. Panel regression methodology is used to determine the relationship between stock mispricing and corporate investment decisions. Results of the study show that Firms with short horizon investors have significantly higher mispricing sensitivity than the firms with long horizon shareholder. Both sides of mispricing affect the investment but the impact of overvaluation is more than undervaluation because the firms issue shareholder equity more than stock repurchase.

Highlights

The study is aimed to find out whether the stock mispricing affects the corporate investment decisions
This study finds out the impact of stock mis-valuation on corporate investment decisions by taking the sample of firms from PSX 100 index for the period of 2007-2014
Market to book decomposition methodology of Rhodes-Kropf et al, (2005) is used to find out different components of mispricing and relate it to the corporate investment activity that is measured by capital expenditures

Summary

Introduction

The study is aimed to find out whether the stock mispricing affects the corporate investment decisions. Current study tests a “catering” channel, through which deviations from fundamentals may affect investment decisions directly. According to this channel, market put pressure on firms to cater the shareholder’s opinion in order to make the investment decisions. There are two types of investors, short horizon and long horizon; Short horizon investors (like mutual fund) are those who are interested in current stock price and short term cash flows. They trade frequently to meet the liquidity need while the long horizon investors (like pension fund) do not trade frequently because they have long term liabilities and concerns about the long term cash flows

Methods

Results

Conclusion