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Optimal Market Timing

42 Pages Posted: 26 Jan 2006  

Dmitry Livdan

University of California, Berkeley

Erica X. N. Li

Cheung Kong Graduate School of Business

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 2006

Abstract

We use a fully-specified neoclassical model augmented with costly external equity as a laboratory to study the relations between stock returns and equity financing decisions. Simulations show that the model can simultaneously and in many cases quantitatively reproduce: procyclical equity issuance; the negative relation between aggregate equity share and future stock market returns; long-term underperformance following equity issuance and the positive relation of its magnitude with the volume of issuance; the mean-reverting behavior in the operating performance of issuing firms; and the positive long-term stock price drift of firms distributing cash and its positive relation with book-to-market. We conclude that systematic mispricing seems unnecessary to generate the return-related evidence often interpreted as behavioral underreaction to market timing.

Keywords: External Finance, Market Timing, Stock Returns, Quantitative Theory, Neoclassical Economics

JEL Classification: E13, E22, E32, E44, G12, G14, G24, G31, G32, G35

Suggested Citation

Livdan, Dmitry and Li, Erica X. N. and Zhang, Lu, Optimal Market Timing (January 2006). Simon School Working Paper. Available at SSRN: https://ssrn.com/abstract=878352 or http://dx.doi.org/10.2139/ssrn.878352

Dmitry Livdan

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 642-4733 (Phone)

Erica X. N. Li

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Lu Zhang (Contact Author)

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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