Optimal Market Timing

43 Pages Posted: 27 Apr 2006

See all articles by Erica X. N. Li

Erica X. N. Li

Cheung Kong Graduate School of Business

Dmitry Livdan

University of California, Berkeley

Lu Zhang, 张橹

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

Multiple version iconThere are 3 versions of this paper

Date Written: February 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.

Suggested Citation

Li, Erica X. N. and Livdan, Dmitry and Zhang, Lu, Optimal Market Timing (February 2006). NBER Working Paper No. w12014. Available at SSRN: https://ssrn.com/abstract=881248

Erica X. N. Li

Cheung Kong Graduate School of Business ( email )

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

Dmitry Livdan

University of California, Berkeley ( email )

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

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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