Managerial Behavior and the Link between Stock Mispricing and Corporate Investments: Evidence from Market-to-Book Ratio Decomposition

We examine the impact of mispricing on corporate investments and its components: capital expenditures, research and development, acquisitions, and asset sales. By decomposing the market-to-book ratio into mispricing and growth components, we show that corporate investments are linked to mispricing through market-timing and catering, after controlling for growth and financial slack. This investment-mispricing link is more pronounced in financially constrained firms and in firms with short-horizon shareholders. Overall, our study indicates that the sensitivity of investments to mispricing is a function of the nature of mispricing, the type of investment, and the firm's characteristics.