42 Pages Posted: 26 Jan 2006
Date Written: January 2006
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: 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