Corporate Financing Decisions and Managerial Market Timing

Abstract:     
This paper presents empirical evidence on the importance of market timing relative to an investment-based explanation of corporate financing decisions. Market timing and investment-based theories both predict underperformance following an increase in net financing, but only market timing theories predict that the composition of firms' financing (equity compared to debt) should also forecast returns. In regressions of future excess returns on both the amount and composition of net financing, we find that the level of net financing is important in explaining subsequent underperformance, but the composition is not. Our results are consistent with changes in investment policy affecting expected returns and inconsistent with successful market timing.

Number of Pages in PDF File: 36

Keywords: Market Timing, Financing Decisions, Investment Policy

working papers series