Working Paper: CEPR ID: DP8820
Authors: Harald Hau; 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.
Keywords: employment; fire sales; investment; market inefficiency; mutual funds
JEL Codes: G11; G14; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock underpricing due to fire sales (G10) | corporate investment (G31) |
| stock underpricing due to fire sales (G10) | employment (J68) |
| financial constraints (H60) | corporate investment (G31) |
| stock underpricing (G24) | corporate investment (for financially constrained firms) (G31) |
| stock prices (G12) | external monitoring process for capital allocation (G31) |