Is Market Timing Good for Shareholders?
Western Finance Association 2015
European Finance Association 2015
41 Pages Posted: 8 Aug 2012 Last revised: 15 Dec 2017
Date Written: December 11, 2017
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: Suggested Citation