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

Polk, Christopher and Sapienza, Paola (2009) The stock market and corporate investment: a test of catering theory. Review of Financial Studies, 22 (1). pp. 187-217. ISSN 0893-9454

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Identification Number: 10.1093/rfs/hhn030


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.

Item Type: Article
Official URL:
Additional Information: © 2008 The Authors
Divisions: Finance
Subjects: H Social Sciences > HG Finance
Sets: Departments > Finance
Date Deposited: 08 Feb 2011 12:20
Last Modified: 20 Jun 2020 01:21

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