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Market Timing and Managerial Portfolio Decisions

61 Pages Posted: 21 May 2003  

Dirk Jenter

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2003

Abstract

This paper provides evidence that top managers have contrarian views on firm value. Managers' perceptions of fundamental value diverge systematically from market valuations, and perceived mispricing seems an important determinant of managers' decision making. An analysis of insider trading patterns shows that low valuation (value) firms are regarded as undervalued by their own managers relative to high valuation (growth) firms. This finding is robust to controlling for non-information motivated trading. Managers in value firms actively purchase additional equity on the open market despite substantial prior exposure to firm risk through stock and option holdings, equity-based compensation and firm-specific human capital. Further evidence links managers' private portfolio decisions directly to changes in corporate capital structures, suggesting that managers actively time the market both in their private trades and in firm-wide decisions.

Keywords: Market timing, Insider trading

Keywords: Market Timing, Seasoned Equity Issues, Insider Trading

JEL Classification: G30

Suggested Citation

Jenter, Dirk, Market Timing and Managerial Portfolio Decisions (December 2003). MIT Sloan Working Paper No. 4310-03; AFA 2003 Washington, DC Meetings; EFA 2002 Berlin Meetings Presented Paper. Available at SSRN: https://ssrn.com/abstract=289159 or http://dx.doi.org/10.2139/ssrn.289159

Dirk Jenter (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/jenter/

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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