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The effects of overvalued equity to firms' financing choice: Evidence from the UK
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School of Business |
Master's thesis
Electronic archive copy is available via Aalto Thesis Database.
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Mcode
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Language
en
Pages
59
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Abstract
Purpose of the study
The objective of this thesis is to study the effects of equity overvaluation to firms` financing decisions. Specifically, the key focus of this thesis is to study whether overvaluation leads to increased equity and total issuance. Furthermore, I study whether particular firm characteristics increase the issuance sensitivity to misvaluation.
Data and methodology
The dataset used in this study includes 7863 firm-year observations from listed companies in the UK. I use value-to-price ratio obtained using residual income model with analyst forecast as my main proxy for misvaluation. I test the relation between misvaluation and security issuance by cross-sectional tests and multivariate regressions for the full sample. Furthermore, I run subsample multivariate regressions sorted by different firm characteristics in order to test issuance sensitivity to misvaluation.
Results
My findings show that overvaluation leads to increased equity and total issuance, thus showing proof of managerial ability to take advantage of market inefficiency, and that financial markets have real-world impacts on managerial decision-making. However, I find only weak evidence of catering impacting financing decisions in the UK.