Market Timing and Managerial Portfolio Decisions
London School of Economics; Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
MIT Sloan Working Paper No. 4310-03; AFA 2003 Washington, DC Meetings; EFA 2002 Berlin Meetings Presented Paper
This paper provides evidence that top managers have contrarian views on firm value. Managers' perceptions of fundamental value diverge systematically from market valuations, and perceived mispricing seems an important determinant of managers' decision making. An analysis of insider trading patterns shows that low valuation (value) firms are regarded as undervalued by their own managers relative to high valuation (growth) firms. This finding is robust to controlling for non-information motivated trading. Managers in value firms actively purchase additional equity on the open market despite substantial prior exposure to firm risk through stock and option holdings, equity-based compensation and firm-specific human capital. Further evidence links managers' private portfolio decisions directly to changes in corporate capital structures, suggesting that managers actively time the market both in their private trades and in firm-wide decisions.
Keywords: Market timing, Insider trading
Number of Pages in PDF File: 61
Keywords: Market Timing, Seasoned Equity Issues, Insider Trading
JEL Classification: G30
Date posted: May 21, 2003
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