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Corporate financing decisions, managerial market timing, and real investment

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Author Info

  • Butler, Alexander W.
  • Cornaggia, Jess
  • Grullon, Gustavo
  • Weston, James P.

Abstract

Both market timing and investment-based theories of corporate financing predict under-performance after firms raise capital, but only market timing predicts that the composition of financing (equity compared with debt) should also forecast returns. In cross-sectional tests, we find that the amount of net financing is more important than its composition in explaining future stock returns. In the time series, investment-based factor models explain abnormal stock performance following a variety of corporate financing events that previous studies link to market timing. At the aggregate level, the amount of new financing is also more important for future market returns than its composition. Overall, our joint tests reveal that measures of real investment are correlated with future returns and measures of managerial market timing are not.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 101 (2011)
Issue (Month): 3 (September)
Pages: 666-683

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Handle: RePEc:eee:jfinec:v:101:y:2011:i:3:p:666-683

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Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Financing policy Corporate investment Market timing;

References

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Citations

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Cited by:
  1. Pengjie Gao & Dong Lou, . "Cross-Market Timing in Security Issuance," FMG Discussion Papers dp718, Financial Markets Group.
  2. Ming Dong & David Hirshleifer & Siew Hong Teoh, 2012. "Overvalued Equity and Financing Decisions," Review of Financial Studies, Society for Financial Studies, vol. 25(12), pages 3645-3683.

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