INVESTOR SENTIMENT,EXECUTIVE COMPENSATION, AND CORPORATE INVESTMENT

INVESTOR SENTIMENT,EXECUTIVE COMPENSATION, AND CORPORATE INVESTMENTDr Hui (Michael) LiDepartment of Economics and FinanceLa Trobe University

AgendaContribution of the paperLiterature reviewThe modelThe empirical testConclusion

Contribution of the paperTheoretical contributionThe paper develops a model that incorporates ownership structure, investor sentiment, and executive compensation into the investigation for corporate investment decisions.

Empirical contributionThe paper shows that when managerial compensation only includes options and vested shares, for the sample of CEOs, the investment level is significantly associated with the weight on options, and generally increases with the proxies for investor sentiment. For the sample of all top executives, the investment level generally increases with the proxies for investor sentiment, but is not significantly associated with the options and shares. when managerial compensation includes options, restricted shares and vested shares, for both the sample of CEOs and top executives, the investment level generally increases with the proxies for investor sentiment, but is not significantly associated with the executive compensation.

Literature reviewSV: Shleifer and Vishny. PS: Polk and Sapienza. GHH: Gilchrist, Himmelberg, and Huberman. BSX: Bolton, Sheiken, and Xiong.

Sheet1

Table 2.9 Empirical tests on Executive Compensation and Corporate Investment: Methodologies

Sample sizeIndustriesPeriodType of investmentMethodology

A M (1987)209 firmsAll1974-1982AcquisitionEvent study

D S (1991)91 firmsManufacturing1974-1988R&D investmentOLS regression

BJK(1996)1249 firmsAll except banking and utility1993Investment opportunityOLS regression

AS (1999)1494 firmsAll1993-1997InvestmentSpline regression (OLS and fixed effects)

DDR(2001)1719 acquisitionsAll1993-1998AcquisitionEvent study&OLS regression

Table 2.3 Empirical Tests on Investor Sentiment and Corporate Investment: Methodology and Data


MSV (1990)All Compustat firmsAll1959-1987Investment excluding acquisitionOLS regression

N/AAll1934-1988Fixed, nonresidential private investmentOLS regression

BRS (1993)All Compustat firmsNon-financial1900-1990Aggregate investmentOLS regression

Lamont (2000)N/ANon-financial1948-1993Aggregate investmentOLS regression

G Y (2001)Janpanese listed firmsAll except banking and utility1981-1994InvestmentOLS regression

C S (2001)N/AAll1966-1992Aggregate investmentOLS regression, system of equations

BSW(2003)All Compustat firmsNon-financial1980-1999InvestmentPooled regression

P S (2004)All Compustat firmsAll1963-2000InvestmentPooled regression

GHH (2004)All Compustat firmsAll1986-2000InvestmentVAR

Table 2.9 Empirical Tests on Institutional Ownership and Corporate Investment: Methodology and Data


Graves (1988)32Computer1976-1985R&DOLS regression

BKS(1991)176All1981-1983R&DOLS regression

HH (1991)129aerospace, chemicals,1977-1987R&DOLS regression

computers, and pharmaceuticals

Bushee (1998)30324 firm-yearAll1983-1994R&DLogit regression

WM (2000)2500All excluding financial firms1966-1992PP&E, R&Dtwo-stage OLS regression

Sheet2

Table 2.10: Empirical Tests on Executive Compensation and Corporate Investment: Results

Dependent variablesIndependent variablesSign or findings

AM (1987)Stock and option/total compensationVariances of the firms after the acquisitionPositive

Stock and option/Salary and bonusPositive

Manager's stock ownershipPositive(insignificant)

D S (1991)Change in R&D expenses(Stock+o.6*options)*stock price/(salary+bonus)Positive

A S (1999)Investment/capitalStock+option/shares outstandingPositive

DDR (2001)New options/total compensationAcquisition premiumPositive

Two-day CARPositive

Three-year BHARPositive

Two-day CARTotal options+stock/shares outstandingPositive

New options/total compensationPositive

OwnershipPositive(insignificant)

Previous options/shares outstandingPositive(insignificant)

Three-year BHARTotal options+stock/shares outstandingPositive(insignificant)


OwnershipMixed

Previous options/shares outstandingMixed

Table 2.4 Empirical Tests on Investor Sentiment and Corporate Investment: Results

Dependent variablesMain independent variablesSign or finding

MSV (1990)Growth in real investmentstock return , sales, cash flowsThe incremental explanatory power of the share

(aggregate level and firm level)(aggregate level and firm level)price change is samll after controlling fundamentals

BRS(1993)Change in log(Investment/capial)change in log(Q),log(profit)Share market plays limites role in invstment decision

Lamont (2000)Stock returninvestment plan growth,Investment plan positively covaries with current

Investment/capital,equity issuancereturns and negatively covaries with future returns

mispricing does not affect the predicting power

G Y (2001)Investment/capitalQ, Cash flow/capitalMispricing significantly affects investment during

asset shocks

C S (2001)Investment/capitalBubble compoenent of share priceBubbles affect fixed investment

BSW(2003)Investment/assetQ, Cash flow/capital, KZ inedexStock price has a greater impact on the investment

of equity-dependent firms

P S (2004)Investment/capitalMispricing proxiesoverpriced (underpriced) firms tend to overinvest

(accrual, share issuance, and momentum)(underinvest)

GHH(2004)Investment/capital, marginal profit of capitalInvestment/capital, marginal profit of capitalDispersion affects investment

standard deviation of analyst forecaststandard deviation of analyst forecast

DHRT (2004)Bid premium, CARPrice/Book,Price/residual income valueMisvaluation is an important driver of the takeover

LS (2005)Net issuance, Investment/capitalaggregate return, Q, firm return, QEquity issuance and merger are more sensitive to

aggregate stock prices than to firm-level prices

Hu(1995)Aggregate returnVariance of market, log price, aggregate QMarket volatility affects investment

Table 2.10 Empirical Tests on Institutional Ownership and Corporate Investment: Results

Dependent variablesMain independent variablesRelation between investment and ownership

Graves (1988)R&Dinstitutional ownership, profit to sales ratioNegative

BKS(1991)R&Dpercentage of outsider director,positive raltion between institutional owneship and investment

institutional ownership, diversification

HH (1991)R&Dinsider ownership, institutional ownershipweak positive raltion between institutional owneship and investment

cash flow, size, market sharel, leverageresults for insider ownershuip are mixed

Bushee (1998)R&Dinsitutional ownership, insider ownershippositive raltion between institutional owneship and investment

Q, cash flow, leverageresults for insider ownershuip are mixed

WM (2000)R&D, PP&Einsitutional ownership,positive raltion between institutional owneship and investment

Q, cash flow, leverage, firm size

Sheet4

Table 2.6: Predictions of the Models on Share Price and Corporate Investments

Stein (1996)If the manager is interested in maximizing current tock price, she must cater to the investors sentiment.

If the manager is interested in maximizing long run tock price, she will use a hurdle rate that reflects the

fundamental risk. Share issues and repurchases also affect the hurdle rate.

SV(2003)Firm with overvalued equity might be able to acquire firms with undervalued or less overvalued equity

PS (2004)When the firm is overpriced (underpriced), the manager overinvests (underinvests). The incentive to

overinvest (underinvest) increases with the duration of the mispricing and decreases with the horizon

of the average shareholder.

GHH(2004)An increase in dispersion in shareholder's beliefs increases the size of the bubble, new share issue

and the investment level.

BSX(2005)The speculative component of stock price can create distortion in CEO compensation leading to

overinvest in short-term speculative projects at the expense of long-term fundamental value.

Models of Investor Sentiment and Corporate Investments

Stein (1996)SV (2003)PS (2006)GHH (2004)BSX (2006)

Manager's goal?Managers maximizesManagers maximizesManagers maximizesManagers maximizesManagers maximizes

old shareholder's valueold shareholder's valueold shareholder's valueold shareholder's valueold shareholder's value

Firm's value depends onInvestment+mispricing+Investment(acquisition)+Investment+mispricing+Investment+mispricingInvestment+mispricing+

capital structuremispricingshareholder's horizonmanager's effort

Investment choicesinvestment leveltake over?investment levelinvestment levelshort-term vs. long-term

Information asymetryN/AN/AN/AN/AManager's action

Managerial contractNoNoNoNoLinear in share prices

Risk preferenceManager:N/AN/AManager:N/AManager:N/AManager-risk averse

Investor: Risk-neutralN/AInvestor: Risk-neutralInvestor: Risk-neutralInvestor: Risk-neutral

Manager's utilityN/AN/AN/AN/AExponential

RationalityManager is rationalManager is rationalManager is rationalManager is rationalManager is rational

Investor is irrationalInvestor is irrationalInvestor is irrationalInvestor is irrationalInvestor is irrational

Sheet3

Table 2.2: Predictions of the Models on Managerial Incentive and Corporate Investment

Narayan (1985)The manager may have incentives to make decisions that will increase the short-term share price at the expense of long-term value.

The long-term contract cannot totally eliminate this short-term incentives.

BS (1993)Short-term objective of the manager plus the information asymmetry may lead not only to underinvestment but also to overinvestment

in long-run projects. When the market cannot observe the investment level, underinvestment occurs. When the market cannot observe

the productivity of the investment, overinvestment occurs.

Narayan (1996)If the managerial ability and the investment level are unknown to shareholders, then cash-only contract results in underinvestment in

long-term projects. Stock-based contract results in overinvestment in long-term projects.

AS (1999)If there are private benefits, an increase in incentives is associated with an increase in investment. If there are private costs, an increase

in incentives is associated with a decrease in investment.

Table 2.1: Models on Managerial Incentive and Corporate Investment

Narayan (1985)BS (1993)Narayan (1996)AS (1999)

Principle-Agent?YesManger maximizesYesYes

own utility

Firm's value depends onAbility + investmentInvestmentAbility + investmentInvestment

Investment choicesshort term vs. long termShort term vs. long termInvestment levelinvestment level

Investment level

Information asymmetryAbilityInvestment levelAbilityInvestment level

Investment levelInvestment productivityInvestment level

Managerial contrct ?NoLinear in firm's valueCash, stock, andCash+profit bonus

stock+cash

Risk preferenceManger:risk-neutralManger:risk-neutralManger:risk-neutralManger:risk-averse

Investor:risk-neutralInvestor:risk-neutralInvestor:risk-neutral

Manager's utilityLinearLinearLinearExponential(CARA)

Investor's sentiment?NoNoNoNo

MSV: Morck, Shleifer, and Vishny. BRS: Blanchard, Rhee, and Summers. GY: Goyal and Yamada. CS: Chirinko and Schaler. BSW: Baker, Stein, and Wurgler. GHH: Gilchrist, Himmelberg, and Huberman. PS: Polk and Sapienza. The more recent evidence supports the theory that mispricing affects investment.

Sheet1








Table 2.3 Empirical Tests on Investor Sentiment and Corporate Investment: Methodologies and Data



















Sheet2









Two-day CARPositive








OwnershipMixed


Empirical Tests on Share Price and Corporate Investment: Results









asset shocks























Sheet4

Table 2.2: Predictions of the Models on Investor Sentiment and Corporate Investments












Table 2.1: Models on Investor Sentiment and Corporate Investments














Sheet3














own utility



Investment level




stock+cash





BKS: Baysinger, Kosnik, and Turl. AS stands for Aggarwal and SamwickTheoretical models and empirical evidence suggest that there is a significant relationship between executive compensation and corporate investment.

Sheet1








Table 2.3 Empirical Tests on Investor Sentiment and Corporate Investment: Methodologies and Data



















Sheet2









Two-day CARPositive








OwnershipMixed


Table 2.4 Empirical Tests on Share Price and Corporate Investment: Results









asset shocks























Sheet4

Table 2.2: Predictions of the Models on Investor Sentiment and Corporate Investments












Table 2.1: Models on Investor Sentiment and Corporate Investments














Sheet3











Models of Managerial Incentive and Corporate Investment



own utility



Investment level



Managerial contract ?NoLinear in firm's valueCash, stock, andCash+profit bonus

stock+cash





AM: Agrawal and Mandelker. DS: Dechow and Sloan. AS: Aggarwal and Samwick. DDR: Datta. Iskandar-Datta, and Raman. CAR is cumulative abnormal return, BHAR is buy-and-hold abnormal return

Sheet1








Table 2.3 Empirical Tests on Investor Sentiment and Corporate Investment: Methodology and Data



















Sheet2

Empirical Tests on Executive Compensation and Corporate Investment: Results








Two-day CARPositive








OwnershipMixed


Table 2.4 Empirical Tests on Investor Sentiment and Corporate Investment: Results









asset shocks























Sheet4

Table 2.6: Predictions of the Models on Share Price and Corporate Investments












Table 2.5: Models on Share Price and Corporate Investments














Sheet3














own utility



Investment level




stock+cash





The model

At time 0, the firm has an investment opportunity. The investment outlay is

. At time 1, the firm is liquidated and the projects payoff, plus any cash remaining, will be distributed to the shareholders. The projects payoff is

. The production function

is concave and its form is known to all shareholders.

is normally distributed with mean zero and variance

.

_1204226874.unknown

_1204707872.unknown

_1218040741.unknown

_1204226982.unknown

_1203154703.unknown

The informed investors belief about the projects payoff The uninformed investors belief about the projects payoff The uninformed investors belief about the projects payoff

The firm can issue unlimited liability debt to finance the project. The total number of investors is N and the fraction of informed investor is . For simplicity, the interest rate is assumed to be zero. Each investor has negative exponential utility with constant risk aversion.The supply of the shares is normalized to 1. Under these assumptions, one can solve for the optimal demand for the uninformed investor and informed investorrespectively.

where

, and that

is normally distributed with mean zero and variance

, where

. Together

and

indicate the sentiment of the uninformed investors .

_1205253228.unknown

_1205253440.unknown

_1205253452.unknown

_1208794994.unknown

_1205253272.unknown

_1204290438.unknown

An example of the relation between investment level, the marginal production and the NPV of the project

the X axis is the investment level. The solid line is the production payoff ((

), the dot line is the projects NPV (

), and the thick dash line is the marginal production (

). As shown in the graph, the NPV is at its maximum when the investment is equal to 0.2 and

=1 at this point. When the investment level is greater than 0.2, the NPV decreases with the investment and

. When the investment level is less than 0.2, the NPV increases with the investment and

.

_1282236346.unknown

_1282238102.unknown

_1282238161.unknown

_1282236381.unknown

_1282235709.unknown

Chart1

0.200853545310.15085354534

0.29485427110.21485427112.5

0.33948298140.23948298142

0.35854501740.24854501741.8181818182

0.37594729280.25594729281.6666666667

0.40677742870.26677742871.4285714286

0.4205760030.2705760031.3333333333

0.43348370730.27348370731.25

0.45704031440.27704031441.1111111111

0.47811241750.27811241751

0.52274112780.27274112780.8

0.55920543910.25920543910.6666666667

0.61674185360.21674185360.5

0.66137056390.16137056390.4

0.69783487520.09783487520.3333333333

0.72866501120.02866501120.2857142857

0.7553712897-0.04462871030.25

0.7789278969-0.12107210310.2222222222

I

R(I)

R(I)-I

R'(I)

I

I, R(I), R'(I) and R(I)-I

Sheet1

0.050.080.10.110.120.140.150.160.180.20.250.30.40.50.60.70.80.9

0.20085354530.29485427110.33948298140.35854501740.37594729280.40677742870.4205760030.43348370730.45704031440.47811241750.52274112780.55920543910.61674185360.66137056390.69783487520.72866501120.75537128970.7789278969

0.15085354530.21485427110.23948298140.24854501740.25594729280.26677742870.2705760030.27348370730.27704031440.27811241750.27274112780.25920543910.21674185360.16137056390.09783487520.0286650112-0.0446287103-0.1210721031

42.521.81818181821.66666666671.42857142861.33333333331.251.111111111110.80.66666666670.50.40.33333333330.28571428570.250.2222222222

Sheet1

0100

000

000

000

000

000

000

000

000

000

000

000

000

000

000

000

000

000

I

R(I)

R(I)-I

R'(I)

I

I, R(I), R'(I) and R(I)-I

Sheet2

Sheet3

Case1: A manager maximized current share price

Observation 1: If

,

_1223297944.unknown

_1266781717.unknown

Observation 2:

is decreasing in

.

_1218144009.unknown

_1266781647.unknown

Observation 3: If

,

.

_1218144345.unknown

_1266781855.unknown

Observation 4: If

,

.

_1218144345.unknown

_1266781947.unknown

Observation 5: If

,

.

_1218144345.unknown

_1266782072.unknown

Case 2: A manager maximizes her own compensationSalary plus restricted shares with long maturitySalary plus options with long maturitySalary plus long-term options plus vested and non-vested shares

Salary plus vested shares plus non-vested restricted shares

Salary plus long-term options plus vested shares

The empirical testThe hypothesesHypothesis 1: If a managers compensation contract only includes options and the managers have vested shares, then the investment level can be increasing or decreasing with the weight on options (shares), and the investment level should increase with investor sentiment. Hypothesis 2: If a managers compensation contract includes options and restricted shares and if the manager has vested shares, then the investment level can be increasing or decreasing with the weight on options (shares), and the investment level should increase with investor sentiment.

The empirical testThe mispricing proxiesDiscretionary accrualsShare turnover ratioDispersion of analyst forecasts of earning per sharePast net equity issuanceDatabase includes Compustat, CRSP, IBES and Thompson Reuters. Time period is between 1992 and 2005.

Discretionary accruals is given byThe dispersion of analyst forecast is given by Shares turnover ratio is calculated as the average monthly ratio of shares traded to shares outstanding. Net equity issuance is the average of the current years net equity issuance and the past two years net equity issuance, scaled by last years net PPE.

comp

Executive Compensation and Corporate Investment (Top Executives)

Panel A

(1)(2)(3)(4)

OP0.0016OP0.0067OP0.0056OP0.0032

[0.71][2.76][0.75][1.67]

DACCR0.0340TURN0.4491DISP-10.0068EQISS0.0504

[4.27]8.5600[1.08][5.07]

Q-10.0492Q-10.0497Q-10.0502Q-10.0397

[15.76][18.77][17][13.81]

CF0.0351CF0.0429CF0.0518CF0.0395

[8.86][16.48][16.18][12.75]

CASH-10.0163CASH-10.0165CASH-10.0178CASH-10.0150

[11.63][19.54][17.09][14.74]

SHROWN-0.0002SHROWN0.0011SHROWN0.0008SHROWN-0.0002

[-0.26][1.41][0.82][-0.19]

OP*DACCR-0.0004OP*TURN-0.0286OP*DISP-10.0006OP*EQISS0.0014

[-0.24][-3.23][0.49][0.88]

Firm-year5411Firm-year8859Firm-year6584Firm-year7061

R square0.2943R square0.4468R square0.3656R square0.4010

Panel B

(1)(2)(3)(4)

OP0.0008OP0.0012OP-0.0028OP0.0021

[0.3][0.4][-0.25][0.92]

RSH-0.0044RSH0.0007RSH0.0471RSH-0.0004

[-1.42][0.17][1.6][0.11]

DACCR0.0168TURN0.0654DISP-1-0.0094EQISS0.0904

[2][1.18][-1.71][6.55]

Q-10.0305Q-10.0294Q-10.0242Q-10.0316

[8.45][8.54][6.66][8.17]

CF0.0627CF0.0568CF0.0734CF0.0689

[11.42][14.43][13.98][15.52]


[11.49][11.3][7.15][2.13]

SHROWN-0.0004SHROWN0.0016SHROWN0.0021SHROWN0.0007

[-0.3][1.47][1.32][0.58]

OP*DACCR0.0005OP*TURN0.0054OP*DISP-1-0.0012OP*EQISS-0.0057

[0.21][0.37][-0.72][-1.71]

RSH*DACCR-0.0152RSH*TURN-0.0659RSH*DISP-10.0086RSH*EQISS-0.0137

[-1.64][-1.19][1.98][-3.79]



Table 4.29: Executive Compensation and Corporate Investment

Panel A

(1)(2)(3)(4)

OP-0.0046OP0.0131OP0.0311OP0.0085418

[-0.99][2.66][1.98][2.21]


[1.72][6.9][0.6][5.26]

Q-10.0462Q-10.0473Q-10.0472Q-10.0363091

[13.52][16.36][14.83][11.36]

CF0.0372CF0.0396CF0.0535CF0.0399153

[7.94][13.02][13.93][11.15]


[10.56][15.5][15.56][10.28]


[0][1.46][0.68][-0.58]

OP*DACCR0.0030OP*TURN-0.0425OP*DISP-10.0033OP*EQISS-0.0035611

[0.95][-2.41][1.31][-1.11]



Panel B

(1)(2)(3)(4)

OP-0.0037OP0.0025OP-0.0205OP-0.0015049

[-0.74][0.43][-0.84][-0.29]

RSH-0.0051RSH-0.0007RSH0.3167RSH-0.003032

[-1.31][-0.11][3.03][-0.47]

DACCR0.0312TURN0.2395DISP-1-0.0112EQISS0.0458068

[3.35][3.68][-1.88][2.44]

Q-10.0341Q-10.0284Q-10.0218Q-10.0342061

[8.06][7.4][5.46][7.62]

CF0.0726CF0.0519CF0.0692CF0.0534596

[11.54][11.54][10.68][10.12]


[6.18][7.44][5.45][1.82]

SHROWN-0.0006SHROWN-0.0006SHROWN-0.0011SHROWN0.0008422

[-0.29][-0.29][-0.41][0.34]

OP*DACCR-0.0010OP*TURN-0.0371OP*DISP-1-0.0042OP*EQISS0.0076947

[-0.21][-1.41][-1.2][0.64]

RSH*DACCR-0.0496RSH*TURN-0.0690RSH*DISP-10.0474RSH*EQISS-0.0204789

[-2.7][-0.67][3.18][-2.2]



Table 4.28: Managerial incentives and firm investment

Panel A

(1)(2)(3)(4)

OP-0.0015OP0.0072OP0.0061OP0.0047

[-0.58][2.7][0.7][2.16]

DACCR0.0286TURN0.3600DISP0.0089EQISS0.0173

[3.19][6.22][1.24][1.47]

Q-10.0481Q-10.0468Q-10.0454Q-10.0417

[13.16][15.56][13.56][12.18]

CF0.0258CF0.0409CF0.0525CF0.0357

[5.43][13.65][13.83][10.11]

CASH0.0149CASH0.0148CASH0.0157CASH0.0124

[8.7][13.86][11.77][9.8]

SHROWN0.0009SHROWN0.0008SHROWN-0.0000SHROWN-0.0004

[0.92][0.97][0][-0.47]

OP*DACCR0.0007OP*TURN-0.0144OP*DISP0.0001OP*EQISS0.0063

[0.42][-1.45][0.1][3.39]

Q-20.0002Q-20.0004Q-20.0040Q-20.0040

[0.05][0.14][1.25][1.25]



Panel B

(1)(2)(3)(4)

OP0.0017OP0.0018OP0.0046OP0.0020

[0.64][0.54][0.36][0.81]

RSH-0.0050RSH-0.0005RSH0.0479RSH0.0002

[-1.58][-0.11][0.86][0.04]

DACCR0.0268TURN0.0835DISP-0.0122DISP0.0956

[2.85][1.43][-1.92][6.34]

Q-10.0320Q-10.0284Q-10.0214Q-10.0400

[7.35][6.89][4.82][8.71]

CF0.0582CF0.0513CF0.0696CF0.0653

[9.59][12.12][11.64][13.69]


[6.32][11.37][6.42][1.69]


[-0.9][0.96][0.84][-0.08]

OP*DACCR0.0020OP*TURN0.0053OP*DISP-0.0004OP*EQISS-0.0113

[0.7][0.34][-0.23][-3.1]

RSH*DACCR-0.0387RSH*TURN-0.0280RSH*DISP0.0075RSH*EQISS-0.0121

[-3.19][-0.41][0.9][-2.81]

Q-20.0011Q-20.0045Q-20.0068Q-2-0.0089

[0.27][1.16][1.61][-2.08]




Panel A

(1)(2)(3)(4)

OP-0.0022OP0.0067OP0.0198OP0.0019

[-0.8][2.29][1.9][0.78]

DACCR0.0135TURN0.3200DISP-0.0032EQISS-0.0088

[1.37][4.93][-0.39][-0.63]

Q-10.0469Q-10.0402Q-10.0348Q-10.0367

[11.25][11.92][9.07][9.59]

CF0.0300CF0.0344CF0.0525CF0.0331

[5.77][10.32][11.6][8.34]


[5.92][13.12][10.64][10.96]

SHROWN0.0013SHROWN0.0014SHROWN0.0012SHROWN0.0003

[1.15][1.44][1.05][0.26]


[1.53][-1.14][1.5][4.81]

Q-20.0022Q-20.0039Q-20.0079Q-20.0026

[0.54][1.24][2.23][0.71]

Q-3-0.0064Q-3-0.0087Q-3-0.0116Q-3-0.0120

[-1.65][-2.97][-3.49][-3.57]



Panel B

(1)(2)(3)(4)

OP0.0017OP0.0017OP-0.0065OP0.0053

[0.57][0.44][-0.44][1.92]

RSH0.0089RSH-0.0012RSH0.1822RSH-0.0001

[0.83][-0.25][2.19][-0.01]

DACCR-0.0043TURN0.0469DISP-0.0108EQISS0.0656

[-1.3][0.75][-1.47][3.86]

Q-10.0309Q-10.0259Q-10.0166Q-10.0391

[6.64][5.81][3.39][7.87]

CF0.0518CF0.0469CF0.0664CF0.0605

[7.8][10.32][9.96][11.72]


[7.24][10.82][5.32][1.81]


[-1.1][0.24][0.6][-0.82]

OP*DACCR0.0035OP*TURN0.0072OP*DISP-0.0022OP*EQISS-0.0007

[1.1][0.43][-1.01][-0.17]


[-2.25][-0.06][2.27][-0.14]

Q-20.0072Q-20.0087Q-20.0101Q-2-0.0086

[1.51][1.92][2.01][-1.66]

Q-3-0.0033Q-30.0004Q-30.0028Q-30.0058

[-0.78][0.11][0.61][1.31]




Panel A

(1)(2)(3)(4)

OP-0.0103OP0.0104OP0.0455OP0.0089

[-1.96][1.9][2.45][1.99]


[1.84][4.76][-103][3.18]

Q-10.0446Q-10.0461Q-10.0443Q-10.0385

[11.42][13.74][12.09][10.11]

CF0.0346CF0.0381CF0.0605CF0.0434

[6.33][10.74][12.67][10.46]


[8.33][11.62][10.25][6.21]


[-0.26][0.5][0.61][-1.01]

OP*DACCR-0.0021OP*TURN-0.0244OP*DISP0.0052OP*EQISS0.0055

[-0.6][-1.26][1.74][1.36]

Q-20.0058Q-20.0013Q-20.0052Q-2-0.0011

[1.58][0.42][0.46][-0.31]



Panel B

(1)(2)(3)(4)

OP-0.0121OP-0.0022OP-0.0203OP0.0014

[-2.27][-0.35][-0.76][0.26]

RSH-0.0042RSH-0.0087RSH0.1490RSH0.0083

[-1.01][-1.34][1.25][0.46]


[3.82][2.11][-1.56][1.28]

Q-10.0290Q-10.0236Q-10.0156Q-10.0335

[6.04][5.38][3.31][6.44]

CF0.0527CF0.0406CF0.0610CF0.0481

[7.08][8.54][8.3][8.45]


[3.51][6.97][2.3][1.35]


[-0.16][-0.91][-1.09][0.05]


[-0.55][-1.54][-0.92][0.49]

RSH*DACCR-0.0484RSH*TURN0.0922RSH*DISP0.0261RSH*EQISS0.0714

[-2.6][0.88][1.52][2.48]

Q-20.0061Q-20.0108Q-20.0138Q-20.0008

[1.3][2.53][2.93][0.15]




Panel A

(1)(2)(3)(4)

OP-0.0107OP0.0014OP0.0250OP-0.0032

[-1.74][0.23][1.17][-0.61]


[1][3.69][-0.99][1.39]

Q-10.0466Q-10.0411Q-10.0345Q-10.0325

[10.05][10.89][8.15][7.67]

CF0.0204CF0.0213CF0.0432CF0.0253

[3.32][5.41][7.49][5.4]


[5.64][9.26][10.42][6.93]

SHROWN0.0002SHROWN0.0008SHROWN0.0015SHROWN-0.0005

[0.11][0.48][0.77][-0.26]


[-0.21][-0.77][0.82][1.77]

Q-20.0086Q-20.0002Q-20.0010Q-20.0037

[2.02][0.05][0.25][0.94]

Q-3-0.0030Q-30.0002Q-3-0.0068Q-3-0.0093

[-0.75][-1.54][-1.91][-2.6]



Panel B

(1)(2)(3)(4)

OP-0.0069OP0.0073OP-0.0425OP0.0023

[-1.18][1.08][-1.43][0.41]

RSH-0.0035RSH-0.0082RSH0.0657RSH0.0128

[-0.76][-1.07][0.5][0.68]


[1.69][1.58][-1][0.66]

Q-10.0262Q-10.0211Q-10.0090Q-10.0374

[5.14][4.52][1.74][6.72]

CF0.0140CF0.0396CF0.0486CF0.0475

[6.36][7.83][5.96][7.59]

CASH-0.0001CASH0.0108CASH0.0039CASH0.0025

[2.11][6.12][1.61][1.12]

SHROWN-0.0017SHROWN-0.0020SHROWN-0.0045SHROWN-0.0011

[-0.02][-0.72][-1.11][-0.31]

OP*DACCR0.0131OP*TURN-0.0597OP*DISP-0.0071OP*EQISS0.0413

[1.81][-2.07][-1.68][3]

RSH*DACCR-0.0535RSH*TURN0.0804RSH*DISP0.0170RSH*EQISS0.0163

[-2.82][0.67][0.9][0.25]

Q-20.0046Q-20.0123Q-20.0150Q-20.0005

[0.87][2.59][2.86][0.08]

Q-30.0040Q-30.0031Q-30.0080Q-30.0022

[0.84][0.73][1.67][0.43]




Panel A

(1)(2)(3)(4)

OP0.0007OP0.0079OP0.0080OP0.0039

[0.34][3.05][ 0.86][2.03]


[4.79][7.08][-0.21][2.88]

DACCR-10.0376TURN-10.0063DISP-10.0235EQISS-10.0230

[4.67][0.10][ 2.81][1.96 ]

Q0.0475Q0.0497Q0.0450Q0.0398

[15.15][18.74][13.89][13.81]

CF0.0333CF0.0429CF0.0503CF0.0395

[8.38][16.48][13.28][12.75]


[11.71][19.54][12.14][14.74]

SHROWN-0.0000SHROWN0.0011SHROWN-0.0001SHROWN-0.0002

[-0.05][1.37][ -0.09][-0.21]


[-0.47][-1.95][0.18][2.59]

OP*DACCR-1-0.0038OP*TURN-1-0.0148OP*DISP-10.0002OP*EQISS-1-0.0060

[-2.63][-1.39][0.12][-3.16]



Panel B

(1)(2)(3)(4)

OP0.0004OP-0.0011OP0.0195OP0.0024

[0.15][-0.36][1.43][0.92]

RSH-0.0046RSH-0.0013RSH0.0586RSH-0.0003

[-1.50][-0.28][1.00][-0.07]


[2.15][1.53][-1.16][4.23]

DACCR-10.0134TURN-1-0.0607DISP-1-0.0053EQISS-10.0198

[1.59][-0.81][-0.73][1.23]

Q0.0302Q0.0294Q0.0235Q0.0303

[8.33][8.54][ 5.86][8.08]

CF0.0635CF0.0568CF0.0708CF0.0689

[11.42][14.43][11.81][15.52]


[11.22][10.99][ 6.39][1.98]

SHROWN-0.0004SHROWN0.0016SHROWN0.0013SHROWN0.0007

[-0.36][1.47][0.74][0.58]

OP*DACCR-0.0001OP*TURN0.0054OP*DISP-0.0054OP*EQISS-0.0043

[-0.05][0.37][-2.22][-1.00]

OP*DACCR-1-0.0047OP*TURN-10.0335OP*DISP-10.0073OP*EQISS-1-0.0009

[-1.68][1.72][3.17][-0.22]


[-1.48][-1.59][2.24][-3.43]

RSH*DACCR-10.0205RSH*TURN-10.0811RSH*DISP-1-0.0190RSH*EQISS-10.0030

[1.75][1.30][-2.70][0.54]




Panel A

(1)(2)(3)(4)

OP-0.0060OP0.0157OP0.0532OP0.0096

[-1.29][3.01][2.74][2.48]


[2.52][5.6][-1.2][3.20]

DACCR-10.0372TURN-10.0077DISP-10.0153EQISS-10.0271

[4.04][0.12][1.84][2.18]

Q0.0445Q0.0473Q0.0433Q0.0363

[12.96][16.36][12.2][11.53]

CF0.0359CF0.0392CF0.0588CF0.0368

[7.68][12.87][12.38][11.53]


[10.73][15.68][10.46][10.21]


[0.01][1.44][0.60][-0.74]


[0.48][-1.03][0.62][0.64]

OP*DACCR-1-0.0074OP*TURN-1-0.0363OP*DISP-10.0044OP*EQISS-1-0.0105

[-2.40][-1.68][1.21][-2.90]



Panel B

(1)(2)(3)(4)

OP-0.0044OP-0.0035OP-0.0182OP-0.0027

[-0.87][-0.57][-0.63][-0.52]

RSH-0.0047RSH0.0007RSH0.2252RSH-0.0034

[-1.21][0.11][1.76][-0.52]


[3.27][3.34][-0.82][2.06]

DACCR-10.0111TURN-10.0718DISP-1-0.0116EQISS-10.0179

[1.19][0.88][-1.57][0.97]

Q0.0333Q0.0286Q0.0223Q0.0347

[7.84][7.49][5.27][7.75]

CF0.0718CF0.0516CF0.0627CF0.0531

[11.02][11.55][8.52][10.03]


[5.78][6.78][2.54][1.97]


[-0.28][-0.31][-1.1][0.33]


[-0.07][-3.46][-0.98][0.91]

OP*DACCR-1-0.0018OP*TURN-10.1466OP*DISP-10.0013OP*EQISS-1-0.0188

[-0.35][3.88][0.3][-1.95]

RSH*DACCR-0.0485RSH*TURN0.0068RSH*DISP0.0056RSH*EQISS-0.0497

[-2.64][0.06][0.22][-3.84]

RSH*DACCR-10.0156RSH*TURN-1-0.1224RSH*DISP-10.0319RSH*EQISS-10.0343

[0.88][-1.17][1.30][3.25]



sum1

Table 4.1 Sample summary statistics (1980-2005)

NMedianSDMeanMin25%th75%thMAX

Panel A

INVEST384860.190.340.283.070.110.323.07

DACCR38486-0.011.23-0.045.73-0.160.125.73

Q384861.311.531.8011.981.011.9311.98

CF384860.272.590.129.750.090.589.75

CASH384860.226.201.8656.670.051.0256.67

KZ384860.291.530.245.11-0.441.085.11

Panel B

INVEST963410.200.460.363.070.110.413.07

TURN963410.050.100.080.580.020.100.58

Q963411.311.721.8911.981.002.0111.98

CF963410.253.46-0.149.750.020.609.75

CASH963410.317.822.7456.670.061.5656.67

KZ963410.311.590.335.110.071.565.11

Panel C

INVEST385840.250.400.372.510.140.442.51

DISP38584-5.491.42-5.49-1.82-6.45-4.58-1.82

Q385841.461.481.979.671.102.219.67

CF385840.352.360.409.630.130.779.63

CASH385840.357.342.8450.550.061.8850.55

KZ385840.151.340.143.67-0.570.983.67

Panel D

INVEST722950.200.400.333.070.110.373.07

EQISS722950.011.760.4412.48-0.010.1312.48

Q722951.281.581.7911.981.001.9111.98

CF722950.253.030.059.750.060.609.75

CASH722950.287.172.3556.670.061.2856.67

KZ722950.361.560.345.11-0.401.225.11

Table 4.9 Sample summary statistics (1982-1999)

NMedianSDMeanMin25%th75%thMAX

Panel A

INVEST187360.200.260.280.020.120.331.64

INST187360.350.240.370.000.160.560.87

DACCR18736-0.000.80-0.02-3.66-0.140.123.61

Q187361.301.271.710.621.031.878.71

CF187360.311.080.40-4.950.130.605.28

CASH187360.203.031.130.000.050.8022.81

Panel B

INVEST454380.230.430.360.010.130.422.78

INST454380.260.240.310.000.100.490.87

TURN454380.050.090.080.000.020.090.49

Q454381.301.521.820.601.021.9510.15

CF454380.292.160.27-11.930.100.648.45

CASH454380.275.722.040.000.061.2341.63

Panel C

INVEST250550.260.410.390.030.150.462.59

INST250550.410.220.420.030.240.590.90

DISP25055-5.241.32-5.22-8.34-6.10-4.39-1.73

Q250551.421.381.900.721.092.138.90

CF250550.351.710.53-7.730.158.378.37

CASH250550.415.172.000.000.240.5935.49

Panel C

INVEST354290.220.340.340.010.120.382.21

INST354290.270.240.240.000.100.490.87

EQISS354290.001.171.17-0.91-0.010.098.39

Q354291.271.341.340.729.051.850.60

CF354290.291.741.74-9.070.110.617.99

CASH354290.234.764.760.000.061.0235.14

Table 4.2 Mispricing and Corporate Investment:

Correlation between variables

Panel A

INVESTDACCRQCFCASHKZ

INVEST1

DACCR0.081

Q0.240.071

CF-0.050.13-0.201

CASH0.360.040.22-0.181

KZ-0.14-0.05-0.25-0.11-0.251

Panel B

INVESTTURNQCFCASHKZ

INVEST1

TURN0.231

Q0.230.261

CF-0.09-0.05-0.251

CASH0.370.190.22-0.191

KZ-0.12-0.10-0.22-0.07-0.241

Panel C

INVESTDISPQCFCASHKZ

INVEST1

DISP0.141

Q0.300.181

CF0.08-0.27-0.031

CASH0.390.090.27-0.041

KZ-0.16-0.14-0.35-0.12-0.251

Panel D

INVESTEQISSQCFCASHKZ

INVEST1

EQISS0.341

Q0.210.361

CF-0.05-0.50-0.201

CASH0.340.450.20-0.121

KZ-0.11-0.12-0.23-0.11-0.221

INVEST~TINSTEQISSQCFCASH

Table 4.9 Correlation between variablesINVESTMENT1.00

Panel AINST0.021

INVESTINSTDACCRQCFCASHEQISS0.35-0.08831

INVEST1Q0.260.06340.36951

INST0.021CF0.120.1513-0.3298-0.08871

DACCR0.110.011CASH0.34-0.03750.44770.24240.12631

Q0.270.090.071

CF0.210.130.180.021

CASH0.35-0.080.040.250.231

Panel B

INVESTINSTTURNQCFCASH

INVEST1

INST0.011

TURN0.300.281

Q0.270.050.311

CF0.040.160.00-0.161

CASH0.38-0.030.200.270.001

Panel C

INVESTINSTDISPQCFCASH

INVEST1.00

INST-0.011.00

DISP0.12-0.271.00

Q0.320.100.201.00

CF0.190.14-0.230.041.00

CASH0.43-0.020.120.300.151.00

Panel D

INVESTINSTEQISSQCFCASH

INVEST1

INST0.021

EQISS0.35-0.091

Q0.260.060.371

CF0.120.15-0.33-0.091

CASH0.34-0.040.450.240.131

Table 4.19 Correlation between variablesTable 4.21 Correlation between variables

Panel APanel A

INVESTOPQCFCASHSHROWNDACCRINVESTOPQCFCASHSHROWNTURN

INVEST1.00INVEST1.00

OP0.181.00OP0.191.00

Q0.330.061.00Q0.380.091.00

CF0.280.030.241.00CF0.310.050.211.00

CASH0.360.220.270.311.00CASH0.430.210.280.371.00

SHROWN0.010.14-0.010.00-0.011.00SHROWN0.050.140.030.060.031.00

DACCR0.06-0.040.090.13-0.05-0.011.00TURN0.390.260.300.120.32-0.061.00

Panel BPanel B

INVESTOPRSHQCFCASHSHROWNDACCRINVESTOPRSHQCFCASHSHROWNTURN


OP0.181.00OP0.201.00

RSH0.020.151.00RSH0.030.171.00

Q0.23-0.03-0.011.00Q0.230.03-0.011.00

CF0.400.080.050.251.00CF0.390.070.030.161.00

CASH0.330.220.060.130.441.00CASH0.310.120.100.030.391.00

SHROWN0.070.160.07-0.020.03-0.001.00SHROWN0.130.190.070.010.060.051.00

DACCR0.060.030.010.060.150.00-0.011.00TURN0.220.260.020.110.100.18-0.041.00INVEST~TOPRSHQCFCASHSHROWNTURNOVER

Panel CPanel C

INVESTOPQCFCASHSHROWNDACCRINVESTOPQCFCASHSHROWNTURNINVESTMENT1

INVEST1.00INVEST1.00OP0.17841

OP0.161.00OP0.171.00RSH0.02920.13211

Q0.330.051.00Q0.370.061.00Q0.22370.03670.0251

CF0.310.030.231.00CF0.330.030.211.00CF0.39520.0680.02980.15341

CASH0.370.240.280.281.00CASH0.430.200.250.381.00CASH0.29010.09660.04940.00840.38531

SHROWN0.020.090.000.010.001.00SHROWN0.070.090.040.060.041.00SHROWN0.02710.08050.0853-0.01110.0018-0.00781

DACCR0.03-0.040.070.13-0.08-0.021.00TURN0.400.220.300.110.32-0.051.00TURNOVER0.23160.26960.02360.09830.09070.2103-0.05021

Panel DPanel D

INVESTOPRSHQCFCASHSHROWNDACCRINVESTOPRSHQCFCASHSHROWNTURN


OP0.171.00OP0.181.00

RSH0.020.111.00RSH0.030.131.00

Q0.22-0.020.021.00Q0.220.040.031.00

CF0.410.100.050.211.00CF0.400.070.030.151.00

CASH0.360.220.050.110.431.00CASH0.290.100.050.010.391.00

SHROWN0.030.080.09-0.010.01-0.011.00SHROWN0.030.080.09-0.010.00-0.011.00

DACCR0.070.02-0.000.070.130.000.001.00TURN0.230.270.020.100.090.21-0.051.00

Table 4.23 Correlation between variablesTable 4.25 Correlation between variables

Panel APanel A

INVESTOPQCFCASHSHROWNDISPINVESTOPQCFCASHSHROWNEQISS


OP0.191.00OP0.191.00

Q0.370.081.00Q0.340.071.00

CF0.340.090.221.00CF0.320.070.221.00

CASH0.430.210.280.461.00CASH0.380.210.240.421.00

SHROWN0.060.120.030.060.001.00SHROWN0.040.140.020.040.021.00

DISP0.150.100.18-0.120.090.051.00EQISS0.330.130.18-0.040.33-0.021.00

Panel BPanel B

INVESTOPRSHQCFCASHSHROWNDISPINVESTOPRSHQCFCASHSHROWNEQISS


OP0.221.00OP0.201.00

RSH0.080.271.00RSH0.030.191.00

Q0.230.04-0.021.00Q0.230.01-0.021.00

CF0.390.070.060.151.00CF0.410.080.030.161.00

CASH0.310.120.190.030.411.00CASH0.300.130.120.030.441.00

SHROWN0.130.180.060.020.070.071.00SHROWN0.140.210.090.000.050.051.00

DISP0.060.090.000.10-0.22-0.080.041.00EQISS0.110.080.06-0.02-0.26-0.020.031.00

Panel CPanel C

INVESTOPQCFCASHSHROWNDISPINVESTOPQCFCASHSHROWNEQISS


OP0.171.00OP0.171.00

Q0.370.061.00Q0.330.051.00

CF0.350.090.231.00CF0.340.060.211.00

CASH0.440.210.250.471.00CASH0.390.200.220.441.00

SHROWN0.080.060.050.070.031.00SHROWN0.060.080.020.050.031.00

DISP0.140.100.17-0.130.090.071.00EQISS0.270.110.14-0.120.26-0.021.00

Panel DPanel D

INVESTOPRSHQCFCASHSHROWNDISPINVESTOPRSHQCFCASHSHROWNEQISS


OP0.201.00OP0.171.00

RSH0.100.271.00RSH0.030.141.00

Q0.230.050.001.00Q0.220.010.011.00

CF0.400.070.100.151.00CF0.410.060.040.171.00

CASH0.290.090.140.020.411.00CASH0.280.100.070.010.421.00

SHROWN0.040.070.040.010.02-0.011.00SHROWN0.050.110.13-0.000.000.001.00

DISP0.020.05-0.020.09-0.24-0.100.011.00EQISS0.070.040.05-0.06-0.23-0.040.021.00

Table 4.20 Sample Summary Statistics (1992-2005)

Panel A

NMedianSDMeanMin25%th75%thMax

INVEST66450.220.270.290.030.130.361.88

OP66451.992.612.770.050.853.8513.10

Q66451.621.492.110.761.202.409.36

CF66450.351.190.53-4.420.160.758.35

CASH66450.274.211.610.000.061.2238.04

SHROWN66450.615.872.980.000.172.5033.12

DACCR6645-0.010.62-0.06-2.69-0.140.092.30

Panel B

INVEST36750.180.170.230.030.120.271.88

OP36751.231.831.800.050.542.4013.10

RSH36750.100.790.240.000.040.2522.96

Q36751.491.121.840.761.172.109.36

CF36750.330.750.46-4.420.170.598.35

CASH36750.142.240.700.000.040.4938.04

SHROWN36750.313.781.440.000.120.8933.12

DACCR36750.000.45-0.01-2.69-0.080.082.30

Panel C

INVEST56440.210.250.280.030.130.341.68

OP56441.001.461.450.030.431.977.82

Q56441.611.452.080.751.202.368.98

CF56440.351.140.51-4.290.160.737.71

CASH56440.253.891.510.000.061.1536.21

SHROWN56440.315.042.300.000.081.6228.68

DACCR5644-0.010.58-0.06-2.61-0.130.092.18

Panel D

INVEST26810.180.160.220.030.120.271.68

OP26810.591.030.930.030.251.217.82

RSH26810.060.730.160.000.020.1420.20

Q26811.471.061.800.751.172.058.98

CF26810.320.750.46-4.290.170.587.71

CASH26810.132.340.660.000.040.4536.21

SHROWN26810.002.990.880.000.050.0828.68

DACCR26810.000.44-0.00-2.61-0.070.082.18


Panel A


INVEST105580.240.350.360.030.140.441.88

OP105582.282.753.030.050.984.2013.10

Q105581.661.622.220.761.212.569.36

CF105580.391.630.70-4.420.160.918.35

CASH105580.385.692.450.000.071.9638.04

SHROWN105580.716.193.280.000.183.0533.12

TURN105580.110.150.160.020.060.210.74

Panel B

INVEST54400.190.200.240.030.120.291.88

OP54401.301.911.880.050.572.5013.10

RSH54400.110.740.250.000.040.2622.96

Q54401.451.101.800.761.142.059.36

CF54400.351.120.59-4.420.170.668.35

CASH54400.174.941.470.000.050.6938.04

SHROWN54400.323.931.500.000.120.9333.12

TURN54400.090.100.120.020.060.140.74

Panel C

INVEST85660.230.310.330.030.140.401.68

OP85661.101.541.580.030.512.147.82

Q85661.621.542.150.751.202.418.98

CF85660.381.520.65-4.290.160.867.71

CASH85660.345.272.240.000.061.7436.21

SHROWN85660.395.242.530.000.092.0428.68

TURN85660.110.150.160.020.060.210.74

Panel D

INVEST39550.190.190.240.030.120.291.68

OP39550.621.080.980.030.281.277.82

RSH39550.060.630.160.000.020.1620.20

Q39551.441.041.760.751.151.998.98

CF39550.341.020.56-4.290.170.647.71

CASH39550.164.931.410.000.040.6036.21

SHROWN39550.152.880.850.000.050.4328.68

TURN39550.090.090.110.020.060.140.74


Panel A


INVEST80500.250.350.370.030.150.451.88

OP80502.352.643.040.061.044.2412.33

Q80501.711.702.310.801.252.679.92

CF80500.431.700.81-3.880.180.979.29

CASH80500.455.782.590.000.072.1837.34

SHROWN80500.746.013.290.000.193.1430.47

DISP8050-6.081.32-6.07-9.46-6.94-5.21-2.71

Panel B

INVEST42160.190.200.240.030.120.291.88

OP42161.351.891.920.060.602.5412.33

RSH42160.110.500.240.000.040.2613.00

Q42161.471.181.850.801.152.119.92

CF42160.371.200.63-3.880.170.709.29

CASH42160.194.891.520.000.050.7737.34

SHROWN42160.343.581.430.000.120.9430.47

DISP4216-6.541.20-6.54-9.46-7.29-5.76-2.71

Panel C

INVEST66140.240.310.340.030.140.421.71

OP66141.131.461.570.030.532.157.34

Q66141.671.642.230.801.242.559.67

CF66140.421.570.76-3.600.180.928.45

CASH66140.405.312.360.000.072.0135.15

SHROWN66140.415.172.580.000.092.1026.89

DISP6614-6.221.30-6.22-9.48-7.07-5.37-2.89

Panel D

INVEST30770.190.190.240.030.120.291.71

OP30770.651.081.000.030.291.307.34

RSH30770.060.330.140.000.030.158.30

Q30771.451.141.810.801.152.079.67

CF30770.351.070.60-3.600.170.678.45

CASH30770.174.851.460.000.040.6835.15

SHROWN30770.152.610.790.000.050.4126.89

DISP3077-6.581.17-6.60-9.48-7.36-5.84-2.89


Panel A


INVEST85830.230.300.330.030.140.411.88

OP85832.132.722.910.050.914.0613.10

Q85831.621.532.150.761.202.479.36

CF85830.381.510.69-4.420.170.878.35

CASH85830.325.172.160.000.061.6538.04

SHROWN85830.666.263.270.000.172.9333.12

EQISS85830.010.740.14-1.85-0.040.103.98

Panel B

INVEST45680.190.200.240.030.120.291.88

OP45681.251.861.830.050.562.4413.10

RSH45680.110.740.250.000.040.2613.00

Q45681.431.061.770.761.142.019.36

CF45680.341.120.60-4.420.160.658.35

CASH45680.164.571.310.000.040.6438.04

SHROWN45680.313.531.370.000.120.8933.12

EQISS4568-0.000.43-0.03-9.46-0.070.023.98

Panel C

INVEST70240.220.280.310.030.140.381.68

OP70241.041.521.520.030.462.057.82

Q70241.601.462.090.751.192.368.98

CF70240.371.430.66-4.290.170.847.71

CASH70240.294.851.990.000.061.4936.21

SHROWN70240.365.272.510.000.081.9528.68

EQISS70240.000.640.08-1.86-0.050.083.37

Panel D

INVEST33430.190.180.230.030.120.281.68

OP33430.601.050.950.030.271.257.82

RSH33430.060.600.160.000.020.1620.20

Q33431.421.011.730.751.141.958.98

CF33430.331.020.56-4.290.160.627.71

CASH33430.144.511.260.000.040.5636.21

SHROWN33430.142.490.770.000.050.4028.68

EQISS3343-0.000.39-0.03-1.86-0.070.023.37

sum

nummanOPRSH

Table 4.1Table 4.8PercentilesSmallestPercentilesSmallestPercentilesSmallest

Sumamary Statistics for Misprxing Proxies, Investment, and Control VariablesSumary Statistics for Insitutional Ownership1%111%0.05405921.31E-071%0.00157910.00009

Full SampleSubsample MeansNMeanSDMinMax5%215%0.17977290.0000795%0.00676420.0000902

NMeanSDMinMax1980s1990s2001-5Full Sample1256010.230.231.16E-080.9910%21Obs2028910%0.30996030.0000944Obs2027610%0.01341770.0001206Obs7328

Panel A. Misprcing Proxies198241730.170.181.83E-060.9725%4125%0.74468140.0002233Sum of Wgt.2027625%0.03879770.0002257Sum of Wgt.7328

DACCR41042-0.0070.2-13.3518.87-0.0071-0.0068-0.0075198347160.180.181.83E-060.92

TURNOVER1159400.145.892.23E-061403.700.0760.170.14198448100.190.191.66E-060.9450%5Mean4.26211250%1.737179Mean2.57359550%0.1015484Mean0.2458936

EQISS730241.3917.573.72E-0718170.431.322.25198553620.200.192.25E-050.95LargestStd. Dev.1.226154LargestStd. Dev.2.80938LargestStd. Dev.0.6706032

DISP146134-5.481.47-12.012.19-4.64-5.47-6.04198656020.220.209.01E-060.9675%5975%3.4828837.4075675%0.252555918.7473

DISP244382-5.011.43-11.822.84-4.30-5.07-5.38198761520.210.201.35E-060.9690%5990%5.8196737.60894Variance7.89261690%0.53672119.94402Variance0.4497086

DISP315465-5.071.6-11.142.82-4.25-4.96-5.26198859820.210.201.03E-060.9695%61095%7.60492543.67842Skewness3.4383895%0.865677720.2172Skewness18.46421

Panel B. Investment198960150.210.215.72E-060.9699%61199%12.8590256.65112Kurtosis28.8681799%1.98988622.96036Kurtosis505.4133

CAPX1029870.476.781.80E-051412.250.440.50.45199061450.210.213.66E-060.97

CAPXRD538912.0120.261.30E-042731.50.971.893.14199159850.240.221.09E-051.00

Panel C. Control Variables199265040.240.237.25E-060.99

Q1123072.063.290.081393.121.772.172.23199373400.250.241.78E-060.99

CF102364-0.3946.14-4690.259624.50.12-0.15-1.37199482690.240.243.31E-070.99

EARN1459880.090.56-11.7666.790.230.0880.0098199590290.240.243.27E-071.00

EARN2446510.150.77-6.7576.120.310.150.046199697230.250.253.06E-061.00

EARN3221530.170.93-4.9272.770.430.230.083199796880.270.263.77E-061.00

DACCR is the discretionary accruals. Turnover is the share turnover ratio. EQISS is the past share1998100640.250.261.16E-081.00

issuance. DISP1, DISP2, and DISP3 are dispersion fpr one-year EPS forecast, two-year EPS forecast1999100420.240.261.26E-081.00

and three-year EPS forecast, respectively. CAPX is the capital expenditure to PPE ratio. CAPX is the sum

of capital expenditure and R&D to PPE ratio. Q is the market value of equity plus total asset minus the

minus the book value of equity minus deferred taxes, divided by firms total assets. CF is the sum of

income before extraordinary items and depreciation and amortization scaled by PPE. EARN1, EARN2,

and EARN3 are one-year, two-year, and three-year earnings forecasts, respectively.

Table 4.16 Managerial Compensation Forms

Panel A

SampleOptionsRestricted SharesBothNone

Observation20289129480732813

Percentage100%63.82%0.00%36.12%0.06%

Panel B

SampleOptionsRestricted SharesBothNone

Observation1528610519053070

Percentage100%68.81%0.00%31.19%0.00%

Panel A presents the compensation forms for top executives. The 'options' column

shows the firms whose top executives hold options, but do not hold restricted

shares during the fisical year. The 'restricted shares' column shows the firms whose

top executives hold restricted share only. The 'both' column shows the firms whose

top executives hold both restricted share and options. The 'none' column shows the

firms whose top executives hold nither options nor restricted shares. Panel B presents

the compensation forms for CEOs.

Table 4.19 Summary Statistics for Options, Restricted shares and Managerial Ownership

Panel A

10%50%95%

NMeanSDSmallestLargestpecentilepecentilepecentile

Options202892.572.811.31E-0756.650.311.747.60

Restricted shares73280.250.679.00E-0522.961.21E-040.100.87

Ownership201312.726.232.48E-0689.010.050.5313.62

Panel B

10%50%95%

NMeanSDSmallestLargestpecentilepecentilepecentile

Options158261.361.624.71E-0528.380.160.864.14

Restricted shares53070.150.577.63E-0520.200.010.060.51

Ownership155212.055.285.57E-0776.110.020.2711.20

All the numbers are in terms of the percentage. Panel A is for the top executives. Panel B is

for the CEOs.

op

Table 4.19 Managerial compensation and firm investment (option)Table 4.20 Managerial compensation and firm investment (option)

Panel APanel A

(1)(2)(3)(4)(5)(6)(1)(2)(3)(4)(5)(6)

MOPi,t-0.0302-0.0629**-0.0675MOPi,t-0.0322-0.0146-0.0523MOPi,t-0.2090**-0.2448**-0.2593**MOPi,t-0.2232**-0.1612-0.2287

(0.0269)(0.0310)(0.0355)(0.0262)(0.0296)(0.0341)(0.0883)(0.1011)(0.1204)(0.1036)(0.1170)(0.1362)

DACCRi,t0.4507***0.4366***0.3368***EQISSi,t0.6901***0.5942***0.4336***DACCRi,t0.9153***0.8557***0.5998***EQISSi,t0.9315***0.5384**0.4910

(0.0388)(0.0431)(0.0483)(0.0650)(0.0797)(0.0961)(0.1225)(0.1375)(0.1632)(0.2111)(0.2514)(0.3003)

Qi,t-10.0504***0.0452***0.0429***Qi,t-10.0509***0.0464***0.0434***Qi,t-10.1150***0.1037***0.0951***Qi,t-10.0974***0.1026***0.0886***

(0.0031)(0.0037)(0.0042)(0.0029)(0.0034)(0.0039)(0.0085)(0.0101)(0.0121)(0.0097)(0.0111)(0.0132)

CFi,t-10.0445***0.0543***0.0611***CFi,t-10.0447***0.0354***0.0366***CFi,t-10.0531***0.1119***0.1299***CFi,t-10.0703***0.01840.0455***

(0.0039)(0.0050)(0.0060)(0.0028)(0.0033)(0.0038)(0.0106)(0.0143)(0.0181)(0.0091)(0.0107)(0.0129)

MSHROWNi,t0.0117***0.0149***0.0117**MSHROWNi,t0.0142***0.0133***0.0088MSHROWNi,t0.01130.01550.0219MSHROWNi,t0.01010.00320.0036

(0.0036)(0.0043)(0.0048)(0.0035)(0.0042)(0.0050)(0.0141)(0.0166)(0.0197)(0.0157)(0.0185)(0.0218)

Qi,t-2-0.000020.0045Qi,t-2-0.00160.0035Qi,t-20.00960.0216*Qi,t-20.00070.0305***

(0.0035)(0.0041)(0.0030)(0.0035)(0.0095)(0.0117)(0.0098)(0.0117)

Qi,t-3-0.0078**Qi,t-3-0.0136***Qi,t-3-0.0091Qi,t-3-0.0470***

(0.0039)(0.0033)(0.0111)(0.0109)

Observations515339733010Observations722757034402Observations315724261819Observations441134772678

R-square0.19080.17610.1695R-square0.26040.22680.1989R-square0.095540.07740.0618R-square0.11650.12060.0502

Panel BPanel B

MOPi,t-0.0187-0.0160-0.0282MOPi,t0.02450.03120.0202MOPi,t-0.1524-0.1684-0.2200MOPi,t0.0405-0.01270.0068

(0.0249)(0.0276)(0.0311)(0.0322)(0.0372)(0.0427)(0.0100)(0.1127)(0.1253)(0.1283)(0.1496)(0.1656)

TURNOVERi,t0.2983***0.2532***0.2223***DISPi,t0.0296***0.0311***0.0352***TURNOVERi,t0.6561***0.6348***0.7507***DISPi,t0.0504***0.0443**0.0342

(0.0387)(0.0429)(0.0485)(0.0048)(0.0055)(0.0064)(0.1371)(0.1541)(0.1739)(0.0190)(0.0218)(0.0240)

Qi,t-10.0603***0.0547***0.0486***Qi,t-10.0614***0.0604***0.0504***Qi,t-10.1132***0.1003***0.0846***Qi,t-10.1101***0.1085***0.0801***

(0.0028)(0.0031)(0.0035)(0.0032)(0.0035)(0.0040)(0.0095)(0.0106)(0.0118)(0.0105)(0.0116)(0.0128)

CFi,t-10.0397***0.0312***0.0330***CFi,t-10.0470***0.0387***0.0403***CFi,t-10.0627***0.0431***0.0373***CFi,t-10.0889***0.0689***0.0719***

(0.0026)(0.0030)(0.0035)(0.0033)(0.0039)(0.0046)(0.0086)(0.0100)(0.0120)(0.0111)(0.0129)(0.0154)

MSHROWNi,t0.0195***0.0174***0.0133***MSHROWNi,t0.0094**0.00530.0028MSHROWNi,t0.02470.01520.0118MSHROWNi,t0.01260.00160.0096

(0.0032)(0.0039)(0.0045)(0.0040)(0.0048)(0.0055)(0.0152)(0.0181)(0.0205)(0.0196)(0.0227)(0.0251)

Qi,t-20.00250.0077**Qi,t-20.00070.0090**Qi,t-20.00400.0207*Qi,t-20.00030.0257**

(0.0029)(0.0034)(0.0033)(0.0038)(0.0098)(0.0111)(0.0107)(0.0118)

Qi,t-3-0.0144***Qi,t-3-0.0184***Qi,t-3-0.0465***Qi,t-3-0.0409***

(0.0032)(0.0036)(0.0104)(0.0113)

Observations835766575197Observations619848193691Observations503940043123Observations385529862278

R-square0.26680.24640.2262R-square0.24910.24480.2296R-square0.13950.12460.0733R-square0.12680.11330.0532

The sample is for the top five excutives. The dependent vatiable is CAPX. The standard deviation of theThe sample is for the top five excutives. The dependent vatiable is CAPXRD. The standard deviation of

coefficient is reported in the parenthesis.The R-square is overall R-square. *** indicates 1% significantthe coefficient is reported in the parenthesis.The R-square is overall R-square. *** indicates 1%

level.**indicates 5% significant level. MOP is the mean options granted of the five top executives.significant level.**indicates 5% significant level. MOP is the mean options granted of the five executives.

MSHROWN is the mean of ownership of the executives excluding the options and restricted shares.MSHROWN is the mean of ownership of the executives excluding the options and restricted shares.

Table 4.21 Managerial compensation and firm investment ( option)Table 4.22 Managerial compensation and firm investment ( option)

Panel APanel A

(1)(2)(3)(4)(5)(6)(1)(2)(3)(4)(5)(6)

OPi,t-0.0466**-0.0198-0.0223OPi,t-0.01080.00970.0041OPi,t-0.2091***-0.1147-0.1161OPi,t-0.1867**-0.1422-0.1335

(0.0223)(0.0260)(0.0304)(0.0225)(0.0263)(0.0304)(0.0719)(0.0845)(0.1062)(0.0861)(0.0988)(0.1124)

DACCRi,t0.3226***0.3233***0.2734***EQISSi,t0.8719***0.7525***0.3886**DACCRi,t0.6703***0.6118***0.5316***EQISSi,t1.044***1.0762***0.1069

(0.0470)(0.0529)(0.0571)(0.0996)(0.1254)(0.1594)(0.1426)(0.1633)(0.1957)(0.3081)(0.3671)(0.4867)

Qi,t-10.0435***0.0377***0.0362***Qi,t-10.0476***0.0371***0.0330***Qi,t-10.0862***0.0757***0.0736***Qi,t-10.0965***0.0918***0.0634***

(0.0036)(0.0044)(0.0051)(0.0035)(0.0043)(0.0048)(0.0097)(0.0118)(0.0145)(0.0108)(0.0131)(0.0144)

CFi,t-10.0403***0.0410***0.0478***CFi,t-10.0265***0.0201***0.0305***CFi,t-10.1026***0.1531***0.1247***CFi,t-10.0558***0.

INVESTOR SENTIMENT,EXECUTIVE COMPENSATION, AND CORPORATE INVESTMENT

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