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

Polk, Christopher ORCID: 0009-0008-0133-6709 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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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.

Item Type:	Article
Official URL:	http://rfs.oxfordjournals.org/
Additional Information:	© 2008 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
Date Deposited:	08 Feb 2011 12:20
Last Modified:	19 Nov 2024 23:21
URI:	http://eprints.lse.ac.uk/id/eprint/32275

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