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...

The early stage of the recent ?financial crisis was marked by large value losses for bank stocks. This paper identifies the equity funds most affected by this valuation shock and examines its consequences for the non-financial stocks owned by the respective funds. We find that (i) ownership...