A Financing-Based Misvaluation Factor and the Cross Section of Expected Returns

Hirshleifer, David and Jiang, Danling (2007): A Financing-Based Misvaluation Factor and the Cross Section of Expected Returns.

Abstract

Behavioral theories suggest that investor misperceptions and market mispricing will be correlated across firms. We use equity and debt financing to identify common misvaluation across firms. A zero-investment portfolio (UMO, Undervalued Minus Overvalued) built from repurchase and new issue firms captures comovement in returns beyond that in some standard multifactor models, and substantially improves the Sharpe ratio of the tangency portfolio. Loadings on UMO incrementally predict the cross-section of returns on both portfolios and individual stocks, even among firms not recently involved in external financing activities. Further evidence suggests that UMO loadings proxy for the common component of a stock's misvaluation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Misvaluation, financing, new issues, repurchase, factor models, market efficiency, behavioral finance
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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