The Relation between Corporate Financing Activities, Analysts' Forecasts and Stock Returns
59 Pages Posted: 25 May 2006
We develop a comprehensive and parsimonious measure of corporate financing activities and document a negative relation between this measure and both future stock returns and future profitability. The economic and statistical significance of the results using our comprehensive measure of external financing is stronger than in previous research focusing on individual categories of corporate financing activities. To discriminate between risk versus misvaluation as explanations for this relation, we analyze the association between our measure of external financing and sell-side analysts' forecasts. Consistent with the misvaluation explanation, we find that our measure of external financing is positively related to overoptimism in sell-side analysts' forecasts.
Keywords: Financing, Sell-side analysts, Capital markets, Market efficiency
JEL Classification: G10, M14, G29, G32, M41
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