The existing research focuses on two channels how stock (mis-)pricing influences firm investment. On the one hand, the informational role of prices is examined. The general conclusion shared by many papers is as follows: managers learn from high prices that the aggregated opinion of investors sees promising investment opportunities. Hence, decision makers invest because they either learn from actual new information or they want to cater the investors and keep the stock prices high because of personal incentives.
On the other hand, the financing role of equity is investigated. Many papers come to the same conclusion. Mispriced stocks are equal to misvalued eq-uity. Consequently, if stocks are overpriced the cost of financing through issuance of new shares declines. If the cost of financing declines, more in-vestment opportunities seem to be promising. Therefore, the firm’s investment activity increases. Additionally, third parties and potential debt lenders like banks evaluate the firm based on the stock performance amongst other aspects. If the stock price is high banks are more likely to issue credit and reduce their demands concerning the terms of debt (e.g. decrease inter-est rate). This is particularly important for financially constrained firms which are only able to invest in new projects if they are able to raise capital on their own.
By following the approach of Polk and Sapienza (2009, pp. 191-194), my thesis examines if the relation of firm investment to stock mispricing is influenced by market concentration. At first, I regress firm investment on mispricing, investment opportunities and cash flow proxies on my whole sample. Afterwards I build sub samples based on market concentration and conduct the same regression on those sub samples again. Thereby, my re-search adds the dimension of market competition to the existing research.
The thesis is organized as follows. In section 2 I briefly sum up the status quo in terms of research on the relation between mispricing and investment behavior. I state and explain my hypotheses in my third chapter. Following the explanations, I describe the data and methodology further in section 4. After evaluating my empirical results and documenting my robustness tests in section 5, I present my conclusions in chapter 6.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Literature Overview
- Effect of Stock Price Evaluation on Firm Investment
- Informational Channel
- Equity-Channel
- Reasons and Effects of Mispricing in Competitive Markets
- Effect of Stock Price Evaluation on Firm Investment
- Hypotheses
- Methodology
- Data
- Empirical Framework
- Empirical Results
- Findings
- Robustness Tests
- Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This thesis investigates the relationship between stock mispricing and real firm investment, with a specific focus on the influence of industry concentration. The research aims to contribute to the existing literature by exploring how market competition affects the connection between stock valuation and investment decisions.
- The impact of stock mispricing on firm investment
- The role of industry concentration in influencing the relationship between stock mispricing and investment
- The interplay of informational and financing channels in investment decisions
- The implications of mispricing for investment behavior in competitive markets
- The impact of market concentration on the effectiveness of stock prices as indicators of investment opportunities
Zusammenfassung der Kapitel (Chapter Summaries)
The first chapter introduces the research topic and provides background information on the relationship between firm investment and stock pricing. It highlights the existing research on the informational and financing roles of stock prices in influencing investment decisions.
Chapter two reviews the relevant literature on the effect of stock price evaluation on firm investment, examining both the informational and equity channels. It also discusses the reasons and effects of mispricing in competitive markets, setting the stage for the subsequent investigation.
Chapter three outlines the hypotheses of the study, which examine the influence of industry concentration on the relationship between mispricing and investment. These hypotheses are based on the existing literature and provide a framework for the empirical analysis.
Chapter four details the methodology used in the study, including the data sources, sample selection, and empirical framework. It provides a clear description of the variables used in the analysis and the statistical methods employed.
Chapter five presents the empirical results of the study, including the findings of the regression analysis and robustness tests. It discusses the significance and implications of these results for the hypotheses and for understanding the influence of market concentration on investment decisions.
Schlüsselwörter (Keywords)
The main keywords and focus topics of this thesis include stock mispricing, firm investment, industry concentration, informational channel, equity channel, competitive markets, investment opportunities, and empirical analysis. This research aims to contribute to the understanding of the relationship between financial markets and real economic activity by investigating the interplay of these key concepts.
- Quote paper
- Jonas Junk (Author), 2017, Mispricing of Stocks and Firm Investment in Competitive Industries. How Do They Influence Each Other?, Munich, GRIN Verlag, https://www.grin.com/document/540417
