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Corporate Financing Decisions, Managerial Market Timing, and Real Investment

52 Pages Posted: 30 Mar 2009 Last revised: 23 Sep 2014

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: June 16, 2010

Abstract

Both market timing and investment-based theories of corporate financing predict underperformance after firms raise capital, but only market timing predicts that the composition of financing (equity compared to debt) should also forecast returns. In cross-sectional tests, we find that the amount of net financing is more important than its composition in explaining future stock returns. In the time-series, investment-based factor models explain abnormal stock performance following a variety of corporate financing events that previous studies link to market timing. At the aggregate level, the amount of new financing is also more important for future market returns than its composition. Overall, our joint tests reveal that measures of real investment are correlated with future returns while measures of managerial market timing are not.

Keywords: Market Timing, Financing Decisions, Investment Policy

JEL Classification: G12, G30, G31, G32, G35

Suggested Citation

Butler, Alexander W. and Cornaggia, Jess and Grullon, Gustavo and Weston, James, Corporate Financing Decisions, Managerial Market Timing, and Real Investment (June 16, 2010). Journal of Financial Economics (JFE), Vol. 101, No. 3, 2011. Available at SSRN: https://ssrn.com/abstract=1370403 or http://dx.doi.org/10.2139/ssrn.1370403

Alexander 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

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://jesscornaggia.com

Gustavo Grullon (Contact Author)

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 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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