Is Market Timing Good for Shareholders?

Ilona Babenko (), Yuri Tserlukevich () and Pengcheng Wan ()
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Ilona Babenko: W.P. Carey School of Business, Arizona State University, Tempe, Arizona 85287
Yuri Tserlukevich: W.P. Carey School of Business, Arizona State University, Tempe, Arizona 85287
Pengcheng Wan: W.P. Carey School of Business, Arizona State University, Tempe, Arizona 85287

Management Science, 2020, vol. 66, issue 8, 3542-3560

Abstract: Corporations often transact in their own mispriced stock. This activity, known as equity market timing , can generate substantial profits and increase the long-term stock price. We challenge a closely related popular view that market timing always benefits firm shareholders. Opportunistic financing maneuvers by a firm can negatively affect its uninformed stock owners because of adverse selection and the change in the firm’s short-term price, whereas the long-term returns do not accumulate to departing stockholders. The negative effect of market timing on stockholders increases with the share turnover. Furthermore, the effect of timing is asymmetric: shareholders prefer that the firm corrects underpricing rather than overpricing. Our theory can be used to better interpret the observed stock issuance and repurchase activities of firms.

Keywords: asymmetric information; market timing; rational expectations; share turnover; share issuance and repurchases (search for similar items in EconPapers)
Date: 2020
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