Real Effects of Stock Underpricing
Journal of Financial Economics, Vol. 109 (2013), 392-408
with Sandy Lai

Abstract

This paper provides evidence for a causal effect of equity prices on corporate investment and employment. We use fire sales by distressed equity funds during the 2007-2009 financial crisis to identify substantial exogenous underpricing. Firms whose stocks are most underpriced have considerably lower investment and employment than industry peers not subject to any fire sale discount. The causal effect of underpricing on investment is found to be largely concentrated on the most financially constrained firms.

Additional Files

A powerpoint presentation of the paper is available here.

The data used in this paper is available from the authors upon request.

Media Coverage

The contagion mechanism underlying the evidence in this paper is discussed on the policy website voxeu.org under the title Understanding and quantifying contagion.