Optimal Market Timing

Xuenan Li, Dmitry Livdan and Lu Zhang ()

No 12014, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use a fully-specified neoclassical model augmented with costly external equity as a laboratory to study the relations between stock returns and equity financing decisions. Simulations show that the model can simultaneously and in many cases quantitatively reproduce: procyclical equity issuance; the negative relation between aggregate equity share and future stock market returns; long-term underperformance following equity issuance and the positive relation of its magnitude with the volume of issuance; the mean-reverting behavior in the operating performance of issuing firms; and the positive long-term stock price drift of firms distributing cash and its positive relation with book-to-market. We conclude that systematic mispricing seems unnecessary to generate the return-related evidence often interpreted as behavioral underreaction to market timing.

JEL-codes: E13 E22 E32 E44 (search for similar items in EconPapers)
Date: 2006-02
New Economics Papers: this item is included in nep-dge, nep-fmk and nep-mac
Note: AP
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Citations: View citations in EconPapers (4)

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