Investor demand, firm investment, and capital misallocation

Jaewon Choi; Xu Tian; Yufeng Wu; Mahyar Kargar

doi:10.1016/j.jfineco.2025.104039

Investor demand, firm investment, and capital misallocation

Jaewon Choi, Xu Tian, Yufeng Wu, Mahyar Kargar

Finance

Research output: Contribution to journal › Article › peer-review

Abstract

Fluctuations in investor demand significantly affect firms’ valuation and access to capital. To quantify their real effects, we develop a dynamic investment model, incorporating both the demand and supply sides of capital. Strong investor demand relaxes financial constraints and facilitates equity issuance and investment, while weak demand encourages opportunistic share repurchases, crowding out investment. We estimate the model using indirect inference, matching the endogenous relationship between investor demand and firm policies. Our estimation reveals that demand fluctuations are important drivers of firm-level investment and economy-wide capital misallocation, accounting for 26.9% of dispersion in MPK and 23.4% of productivity losses.

Original language	English (US)
Article number	104039
Journal	Journal of Financial Economics
Volume	168
DOIs	https://doi.org/10.1016/j.jfineco.2025.104039
State	Published - Jun 2025

Keywords

Capital misallocation
Firm investment
Investor demand
Market timing
Structural estimation

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics
Strategy and Management

Online availability

10.1016/j.jfineco.2025.104039

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title = "Investor demand, firm investment, and capital misallocation",

abstract = "Fluctuations in investor demand significantly affect firms{\textquoteright} valuation and access to capital. To quantify their real effects, we develop a dynamic investment model, incorporating both the demand and supply sides of capital. Strong investor demand relaxes financial constraints and facilitates equity issuance and investment, while weak demand encourages opportunistic share repurchases, crowding out investment. We estimate the model using indirect inference, matching the endogenous relationship between investor demand and firm policies. Our estimation reveals that demand fluctuations are important drivers of firm-level investment and economy-wide capital misallocation, accounting for 26.9% of dispersion in MPK and 23.4% of productivity losses.",

keywords = "Capital misallocation, Firm investment, Investor demand, Market timing, Structural estimation",

author = "Jaewon Choi and Xu Tian and Yufeng Wu and Mahyar Kargar",

note = "Dimitris Papanikolaou was the editor for this article. We thank Jules van Binsbergen, Antonio Falato, Itay Goldstein, Dimitris Papanikolaou, Lukas Schmid, Dejanir Silva, \u015Eelale T\u00FCzel, Brian Waters, Toni M. Whited, Yao Zeng; an anonymous referee; conference participants at WFA 2022, AFA 2023, EFA 2023, ITAM Finance Conference, MFA 2023; and seminar participants at Chung-Ang University, the Federal Reserve Board, Indiana University, KAIST, Korea University, Seoul National University, Texas A&M University, University of Florida, Columbia University SIPA, and Chinese University of Hong Kong for their helpful comments and suggestions. Tian gratefully acknowledges financial support from the Business, Systems, and Technology Innovation Research Grant and Terry-Sanford Award.",

year = "2025",

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doi = "10.1016/j.jfineco.2025.104039",

language = "English (US)",

volume = "168",

journal = "Journal of Financial Economics",

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AU - Choi, Jaewon

AU - Tian, Xu

AU - Wu, Yufeng

AU - Kargar, Mahyar

N1 - Dimitris Papanikolaou was the editor for this article. We thank Jules van Binsbergen, Antonio Falato, Itay Goldstein, Dimitris Papanikolaou, Lukas Schmid, Dejanir Silva, \u015Eelale T\u00FCzel, Brian Waters, Toni M. Whited, Yao Zeng; an anonymous referee; conference participants at WFA 2022, AFA 2023, EFA 2023, ITAM Finance Conference, MFA 2023; and seminar participants at Chung-Ang University, the Federal Reserve Board, Indiana University, KAIST, Korea University, Seoul National University, Texas A&M University, University of Florida, Columbia University SIPA, and Chinese University of Hong Kong for their helpful comments and suggestions. Tian gratefully acknowledges financial support from the Business, Systems, and Technology Innovation Research Grant and Terry-Sanford Award.

PY - 2025/6

Y1 - 2025/6

N2 - Fluctuations in investor demand significantly affect firms’ valuation and access to capital. To quantify their real effects, we develop a dynamic investment model, incorporating both the demand and supply sides of capital. Strong investor demand relaxes financial constraints and facilitates equity issuance and investment, while weak demand encourages opportunistic share repurchases, crowding out investment. We estimate the model using indirect inference, matching the endogenous relationship between investor demand and firm policies. Our estimation reveals that demand fluctuations are important drivers of firm-level investment and economy-wide capital misallocation, accounting for 26.9% of dispersion in MPK and 23.4% of productivity losses.

AB - Fluctuations in investor demand significantly affect firms’ valuation and access to capital. To quantify their real effects, we develop a dynamic investment model, incorporating both the demand and supply sides of capital. Strong investor demand relaxes financial constraints and facilitates equity issuance and investment, while weak demand encourages opportunistic share repurchases, crowding out investment. We estimate the model using indirect inference, matching the endogenous relationship between investor demand and firm policies. Our estimation reveals that demand fluctuations are important drivers of firm-level investment and economy-wide capital misallocation, accounting for 26.9% of dispersion in MPK and 23.4% of productivity losses.

KW - Capital misallocation

KW - Firm investment

KW - Investor demand

KW - Market timing

KW - Structural estimation

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Investor demand, firm investment, and capital misallocation

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Keywords

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