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Corporate Financing Activities and Contrarian Investment

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  • Turan G. Bali
  • K. Ozgur Demirtas
  • Armen Hovakimian

Abstract

This paper investigates the risk versus mispricing explanation of superior returns to contrarian strategies using the interactions between value-to-market indicators and corporate financing transactions that increase or decrease a firm's outstanding equity. Portfolio-level analyses and firm-level cross-sectional regressions indicate that the well-documented contrarian profits soar when value stocks which repurchase shares (value repurchasers) and growth stocks which issue shares (growth issuers) are considered. Various risk measures indicate that value repurchasers are not riskier than growth issuers. Furthermore, time-series of realized growth rates, analysts' long-term growth estimates, and sensitivity of portfolio returns to investor sentiment support the misvaluation explanation. Copyright 2010, Oxford University Press.

Suggested Citation

  • Turan G. Bali & K. Ozgur Demirtas & Armen Hovakimian, 2010. "Corporate Financing Activities and Contrarian Investment," Review of Finance, European Finance Association, vol. 14(3), pages 543-584.
    • Handle: RePEc:oup:revfin:v:14:y:2010:i:3:p:543-584
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    File URL: http://hdl.handle.net/10.1093/rof/rfp012
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    Citations

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    Cited by:

    1. Gikas Hardouvelis & Georgios Papanastasopoulos & Dimitrios Thomakos & Tao Wang, 2012. "External Financing, Growth and Stock Returns," European Financial Management, European Financial Management Association, vol. 18(5), pages 790-815, November.
    2. Goto, Shingo & Kalesnik, Vitali, 2022. "Exploiting the persistence in managerial market timing," Finance Research Letters, Elsevier, vol. 46(PB).
    3. Andreas G. Koutoupis & Christos G. Kampouris & Athanasia V. Sakellaridou, 2022. "Can Financial Strength Indicators Form A Profitable Investment Strategy? The Case Of F-Score in Europe," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 21(3), pages 355-372, September.
    4. Day, Min-Yuh & Ni, Yensen, 2023. "Do clean energy indices outperform using contrarian strategies based on contrarian trading rules?," Energy, Elsevier, vol. 272(C).
    5. Huang, Wei & Liu, Qianqiu & Ghon Rhee, S. & Wu, Feng, 2012. "Extreme downside risk and expected stock returns," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1492-1502.
    6. Huang Yi & Yang Xiugang, 2018. "Investors’ Sentiment and Enterprise's Non-Efficient investment: The Intermediary Effect of Stock Price Volatility," International Journal of Business and Social Research, LAR Center Press, vol. 8(7), pages 1-14, July.
    7. Demirtas, K. Ozgur & Rodgers Cornaggia, Kimberly, 2013. "Initial credit ratings and earnings management," Review of Financial Economics, Elsevier, vol. 22(4), pages 135-145.
    8. Walkshäusl, Christian, 2015. "Equity financing activities and European value-growth returns," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 27-40.
    9. Shrikant P. Jategaonkar & Linda M. Lovata & Xiaoxiao Song, 2023. "Growth opportunities and earnings management by cross-listed and U.S. firms," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 47(1), pages 157-183, March.
    10. Day, Min-Yuh & Ni, Yensen & Huang, Paoyu, 2019. "Trading as sharp movements in oil prices and technical trading signals emitted with big data concerns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 525(C), pages 349-372.
    11. Papanastasopoulos, Georgios, 2017. "Accrual anomaly and corporate financing activities," Finance Research Letters, Elsevier, vol. 20(C), pages 125-129.
    12. Wang, Wenzhao & Su, Chen & Duxbury, Darren, 2022. "The conditional impact of investor sentiment in global stock markets: A two-channel examination," Journal of Banking & Finance, Elsevier, vol. 138(C).
    13. K. Ozgur Demirtas & Kimberly Rodgers Cornaggia, 2013. "Initial credit ratings and earnings management," Review of Financial Economics, John Wiley & Sons, vol. 22(4), pages 135-145, November.
    14. Ni, Yensen & Cheng, Yirung & Huang, Paoyu & Day, Min-Yuh, 2018. "Trading strategies in terms of continuous rising (falling) prices or continuous bullish (bearish) candlesticks emitted," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 501(C), pages 188-204.
    15. Huang Yi & Yang Xiugang, 2018. "Investors’ Sentiment and Enterprise's Non-Efficient investment: The Intermediary Effect of Stock Price Volatility," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 8(7), pages 1-14, July.
    16. Serkan İmişiker & Rasim Özcan & Bedri Kamil Onur Taş, 2015. "Price Manipulation by Intermediaries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(4), pages 788-797, July.
    17. Atilgan, Yigit & Demirtas, K. Ozgur & Erdogan, Alper, 2016. "Share issuance and equity returns in Borsa Istanbul," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 320-333.

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