Equity Issues and Returns: Managerial Timing, Reaction, or Both?

36 Pages Posted: 11 Dec 2008 Last revised: 4 Mar 2009

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Jess Cornaggia

Pennsylvania State University - Department of Finance

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business

James Weston

Rice University - Jesse H. Jones Graduate School of Business

Date Written: November 14, 2008

Abstract

We run a horse race between two competing hypotheses about the relationship between market returns and managers' decisions to issue or retire equity: that managers are successfully forecasting (timing) subsequent market returns versus reacting to prior market returns. Our empirical framework allows the timing and reaction stories compete for explanatory power in our tests. We show that managers react to prior equity market returns in deciding when to transact equity, but they cannot successfully forecast subsequent equity market returns. Evidence from equity issues, filings, and repurchases all supports these conclusions. In industry level tests, we find that managers consistently react to industry level returns, and what little timing ability they may have is confined to the narrowest industry classifications.

Suggested Citation

Butler, Alexander W. and Cornaggia, Jess and Grullon, Gustavo and Weston, James, Equity Issues and Returns: Managerial Timing, Reaction, or Both? (November 14, 2008). Available at SSRN: https://ssrn.com/abstract=1314485 or http://dx.doi.org/10.2139/ssrn.1314485

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business ( email )

MS 531
Houston, TX 77005
United States
713-348-6341 (Phone)

HOME PAGE: http://www.owlnet.rice.edu/~awbutler/

Jess Cornaggia (Contact Author)

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://jesscornaggia.com

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business ( email )

P.O. Box 2932
Houston, TX 77252-2932
United States
(713) 348-6138 (Phone)
(713) 348-6331 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~grullon/

James Peter Weston

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005
United States
713-348-4480 (Phone)
713-348-6331 (Fax)

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