Security Issue Timing: What Do Managers Know, and When Do They Know it?
London School of Economics; National Bureau of Economic Research (NBER); CEPR
Tuck School of Business at Dartmouth
Jerold B. Warner
University of Rochester – Simon Business School
July 1, 2007
Simon School Working Paper No. FR 06-12
MIT Sloan Research Paper No. 4654-07
Rock Center for Corporate Governance Working Paper No. 25
We study put option sales on company stock by large firms. An often cited motivation for these transactions is market timing, and managers’ decision to issue puts should be sensitive to whether the stock is undervalued. We provide new evidence that large firms successfully time security sales. In the 100 days following put option issues, there is roughly a 5% abnormal stock price return, with much of the abnormal return following the first earnings release date after the sale. Direct evidence on put option exercises reinforces these findings: exercise frequencies and payoffs to put holders are abnormally low.
Number of Pages in PDF File: 41
Keywords: corporate pu option sales, marketing timing
JEL Classification: G32, G35
Date posted: November 17, 2006 ; Last revised: December 17, 2009