Private Firm Investment and Public Peer Misvaluation
Badertscher, Brad A., Shanthikumar, Devin M., Teoh, Siew Hong
The Accounting Review · 2019 · Volume 94 · Issue 6
Abstract
We study how public firm misvaluation affects private peer firm investments. Aneconomic competition hypothesispredicts a negative relation because misvaluation-induced new investment by public firms crowds out investment by private peers that share common input or output markets. An alternativeshared sentiment hypothesispredicts a positive relation because private firm stakeholders share in the sentiment associated with misvaluation in public markets. Misvaluation is proxied using both the price-to-fundamental ratio and an exogenous instrument obtained from mutual fund flows. The evidence is consistent with the shared sentiment hypothesis, and robust to alternative treatments for growth opportunities. Private firms finance misvaluation-induced investment primarily internally or externally with debt, not equity. Finally, misvaluation-induced investment increases future return on investment for private firms, in contrast with public firms. Overall, these findings suggest that overvaluation in public markets increases private firm investments and has beneficial effects on private firm investments by relaxing financing constraints. JEL Classifications:G32; M41. Data Availability:Data are available from sources identified in the paper.
Keywords
private firms, investment, misvaluation, overvaluation, catering pressure, debt issuance, equity issuance, agency costs
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