Optimal Market Timing

42 Pages Posted: 8 Nov 2006

See all articles by Dmitry Livdan

Dmitry Livdan

University of California, Berkeley

Erica X. N. Li

Cheung Kong Graduate School of Business

Lu Zhang

University of Rochester

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 under reaction to market timing.

JEL Classification: G12, G32, G24

Suggested Citation

Livdan, Dmitry and Li, Erica X. N. and Zhang, Lu, Optimal Market Timing (January 2006). Sixteenth Annual Utah Winter Finance Conference, Available at SSRN: https://ssrn.com/abstract=941763 or http://dx.doi.org/10.2139/ssrn.941763

Dmitry Livdan (Contact Author)

University of California, Berkeley ( email )

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Erica X. N. Li

Cheung Kong Graduate School of Business ( email )

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One East Chang An Avenue
Beijing, 100738
China

Lu Zhang

University of Rochester ( email )

300 Crittenden Blvd.
Rochester, NY 14627
United States

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