Mispricing in the Equity Market: Applied to Saudi Stock Market Adnan F. Abo Al Haija* Abstract This paper intends to examine whether the Saudi equity market exhibit some kind of mispricing during the years 2013 and 2014, and to study the effect of fundamental and non-fundamental key factors on relative mispricing within a comparative and dynamic context. Mispricing is defined as the deviation of market stock prices from intrinsic values, expressed in a ratio form. The stock’s intrinsic value is estimated using the residual income model in two methods; the traditional Ohlson (1995) model and the regression method. It is found that the Saudi stock exchange is characterized by the presence of persistent overpricing over recent years, and that firm’s abnormal earnings per share and stocks’ turnover play a positive role in keeping market prices in line with their fundamental values. Moreover, it was found that the initial mispricing spread is negatively related with its subsequent dynamic change; which means that stocks which are initially overpriced will exhibit in the next period a movement towards underpricing, a sign of convergence. The major limitation of this study is the lack of sufficient and consistent data for longer periods. Key words: mispricing spread, intrinsic value, abnormal earnings, stock market, Saudi Arabia. * Associate professor at the Finance Department in the College of Business, Alfaisal University. Correspondence: College of Business- Alfaisal University, P.O.Box 50927, Takhasusi Road, Riyadh 11533, Saudi Arabia

Persistence of Abnormal Earnings and Stock Valuation: Applied to Saudi Arabia Adnan Fadel Abo Al Haija Finance Department, Alfaisal University ABSTRACT This study aims at analyzing the relationship between real performances of firms in the product market with their financial performance in stock markets. This relationship has been investigated theoretically and empirically by linking persistence of abnormal earnings with market valuation in the long run using data of Saudi Arabian public shareholding companies listed in the Saudi stock market. It is found that persistence of abnormal earnings is one of the major determinant factors of market valuation. It is found also that dynamic patterns of abnormal earnings over time are essential factors in shaping growth rates and levels of market-to-book ratios. Keywords: Abnormal earnings; persistence; stock valuation; Saudi Arabia

Stock Market Valuation and Firms’ Investment in the Presence of Market Frictions: Evidence from Saudi Arabia Adnan F. Abo Al Haija* Abstract This paper aims at examining the relationship that might exist between stock market valuation and corporate investment in a small emerging resource-based economy like Saudi Arabia. The existence of such a relationship is supported in theory as well as in the empirical evidence of previous studies. Tobin’s q reflects firms’ growth opportunities. It is considered by many researchers as the major, if not the sole, factor determining corporate investment in the absence of market frictions. Misvaluation in the stock market is one of the market frictions found to have a significant effect on firm’s investment. Managers attempt to expand their investment plans when the stock prices of their firms move towards overvaluation. This occurs most likely when investors are expecting, either correctly or erroneously, a good performance of those firms in the product, and consequently in the stock markets. Financing constraints is also another factor affecting firms’ investment, which represents an important friction in the capital market. Firms facing constraints in getting external finance will switch towards internally generated funds to finance their investment plans. This paper examines the firms’ investment determinants in the presence of market frictions by using data from Saudi Arabia. The sample of the study includes 120 companies, which comprises all the exchange-listed companies in all sectors except financial, banking, insurance, and utilities sectors. The time frame of data covers the period 2010 to 2014. The empirical results confirm our theoretical predictions regarding the solid link between corporate investment and the stock market. It is found that stock market significantly affects firms’ investment through two different paths: Tobin’s q and stock market valuation. If markets revalue the growth opportunities of firms (higher Tobins’ q), or overvalue their stocks, higher investment expenditures will result. On the other hand, Saudi companies are found not to be financially constrained. JEL Classification: D21, G14, M21 Keywords: Corporate investment, market frictions, Tobin’s q, misvaluation, Saudi Arabia.