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Pseudo Market Timing: Fact or Fiction?

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  • de Jong, Frank
  • Dahlquist, Magnus

Abstract

The average firm going public or issuing new equity underperforms the market in the long run. A potential explanation of this long-run underperformance has to do with the endogeneity of the number of new issues. That is, due to the clustering of events after periods of high abnormal returns in issues, ex post measures of average abnormal returns may be negative on average despite zero ex ante abnormal returns. This could lead one to incorrectly infer underperformance. We provide a thorough evaluation of the endogeneity problem in event studies as it relates to long-run underperformance and undertake both theoretical and simulation analyses. We argue that it is unlikely that the endogeneity of the number of new issues explains the long-run underperformance in equity issuances.

Suggested Citation

  • de Jong, Frank & Dahlquist, Magnus, 2004. "Pseudo Market Timing: Fact or Fiction?," CEPR Discussion Papers 4609, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4609
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    Cited by:

    1. Nicholas Barberis & Ming Huang, 2008. "Stocks as Lotteries: The Implications of Probability Weighting for Security Prices," American Economic Review, American Economic Association, vol. 98(5), pages 2066-2100, December.
    2. Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.
    3. Malcolm P. Baker & Ryan Taliaferro & Jeffrey Wurgler, 2004. "Pseudo Market Timing and Predictive Regressions," NBER Working Papers 10823, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Abnormal return measures; Endogenous events; Event studies; Initial public offerings; Long-run underperformance; Pseudo market timing;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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