Abstract:Corporate investment is not only affected by investment opportunities or financing constraints, but also by irrational psychological bias of participants. If we take foreign countries as reference, the domestic research on behavioral finance starts later, and these studies mainly focus on the impact on the amount of capital investment, with little attention to the R&D expenditure. However, it is worth noting that China's economic growth needs some new sources of power after being hit heavily by the 2008 financial crisis, and innovation has gradually become a weapon for the government and enterprises to revive the economy. But it's a pity that the R&D expenditure has a slowly increasing speed in China from 2010-2015.This reality confusion brings a new opportunity to explore the relationship between market mispricing and R&D investment. It also shows that it has both theoretical and practical significance to explore the relationship between market mispricing and R&D investment, at the present stage that China intends to promote economic transformation with innovation.Based on the managers' reputation mechanism, this paper conducts an empirical analysis of the relationship between the market mispricing and R&D expenditure, in the meanwhile, it also examines in which paths the mispricing affects the R&D expenditure. Firstly, the result shows that the market mispricing has a negative effect on the R&D expenditures. It's contrary to the findings of most scholars. The paper gives several rational explanations for the result. The first one is that corporate managers gets more information than the investors, so they can realize the false boom of the market and know that the previous overvaluation will not last. On the contrary, there will reverse adjustments, which can result in a sharp drop in stock returns and prices. In order to achieve a steady market value, companies will reduce their investment and avoid financial constrain resulting from irrational expansion. The second one is that after 2008 crisis, managers tend to be conservative so that they can protect their position and credit. Managers who lose reputation have a significant decline in their ability to resist risks. Once they're risk-averse, the shortcoming of innovation, such as great investment, long-term, high risk, will be magnified, and their rational investment level of R&D will decline. The third one is that companies always form an alliance with the dealers and invest heavily to raise stock price, this will spend lots of money and make companies have no ability to continue invest in the next period. The fourth one is that comparing with foreign mature capital markets, our markets are full of optimistic investors, which may bring the adverse result. Next, this paper also finds that if market has a high turnover, the negative relation of mispricing and R&D expenditures will be attenuated. This means that investors' overconfidence will influence managers' conservatism, because investors' voting with their feet is a nightmare for managers. Finally, the paper considers the condition that both investors' and managers' are overconfident.The result becomes that the negative relation of mispricing and R&D expenditures won't be regulated by the investors' sentiment. That because overconfident managers think the price is only doing what comes naturally. In the additional test, this paper sheds light on how the mispricing affects the company innovation. The empirical result shows that mispricing has two paths to influence R&D expenditures simultaneously, direct reverse catering and indirect equity financing. These two paths has opposite effects, but the former is dominant.This paper makes an empirical analysis based on the data of non-financial company from 2010 to 2015, which listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange. The paper finds that although R&D expenditure plays an important role in promoting the long-term development of the company, the manager's decision is no longer radical. The main reasons conclude that the stock market has a negative risk premium and stock price deviates from intrinsic value for a long time, and also because managers think highly of their reputation. The results of this paper is meaningful for company to make decisions on R&D investment. On the other hand, it will help selecting managers. It shows that it is of great significance to continue to improve the mechanism of company information disclosure and strengthen the rational education of investors, because companies need a good environment to innovate.

Keyword:market mispricing; R&D investment; reverse catering; reputation mechanism; overconfidence;