Can Managers Forecast Aggregate Market Returns?

Abstract:     
Previous studies have found that the share of equity in total new issues (S) is negatively correlated with future equity market returns (in-sample). Researchers have interpreted this finding as evidence that managers are able to predict the systematic component of their stock returns and to issue equity when the market is overvalued. In this paper we show that after controlling for "look-ahead bias", S does not provide real-time predictive power for forecasting market returns. Further, we show that even the in-sample predictive power of S appears to stem from aggregate pseudo market timing as in Schultz (2003) and not from any abnormal ability of managers to time the equity markets.

JEL Classifications: G14

Working Paper Series