This paper finds that stock underpricing triggers underinvestment in research. To identify underpricing, I build on previous literature on liquidity induced trading pressure to develop an exogenous proxy of mispricing. This measure is based on funds that underperform because of their over-exposure to an economically distressed industry and are forced to sell stocks of healthy firms in unrelated industries for liquidity reasons. As a consequence price drops below fundamentals and firms respond decreasing innovation activity. The main empirical explanation which is consistent with this finding is that underpriced firms prefer to divert resources from R&D into buying back their own shares at a discount, in particular when financially constrained and held by impatient shareholders.