Is Market Timing Good for Shareholders?

Western Finance Association 2015

European Finance Association 2015

Finance Down Under 2015

41 Pages Posted: 8 Aug 2012 Last revised: 15 Dec 2017

See all articles by Ilona Babenko

Ilona Babenko

Arizona State University

Yuri Tserlukevich

Arizona State University (ASU)

Pengcheng Wan

Arizona State University (ASU) - Finance Department

Date Written: December 11, 2017

Abstract

Corporations commonly transact in their own mispriced stock using private information. This activity, known as equity market timing, can generate substantial profits and increase the long-term stock price. We challenge a closely related popular view that market timing benefits firm shareholders. Timing can adversely affect current stock owners through the short-term price and quantity of traded shares, whereas the benefits of timing do not accumulate to departing stockholders. The negative effect of market timing on stockholders increases with the share turnover. Further, the effect of timing is asymmetric: shareholders prefer that the firm corrects underpricing rather than overpricing. Our theory can be used to better interpret the observed stock issuance and repurchase activities of firms and can explain the popularity of stock buybacks relative to seasoned equity offerings.

Keywords: equity market timing, signaling, SEO, share repurchase

JEL Classification: G30, G32, G35

Suggested Citation

Babenko, Ilona and Tserlukevich, Yuri and Wan, Pengcheng, Is Market Timing Good for Shareholders? (December 11, 2017). Western Finance Association 2015; European Finance Association 2015; Finance Down Under 2015. Available at SSRN: https://ssrn.com/abstract=2126417 or http://dx.doi.org/10.2139/ssrn.2126417

Ilona Babenko

Arizona State University ( email )

Department of Finance
W.P. Carey School of Business
Tempe, AZ 85287
United States

Yuri Tserlukevich

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

Pengcheng Wan (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

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