Pseudo Market Timing: Fact or Fiction?
AbstractThe average firm going public or issuing new equity has underperformed the market in the long run. Endogeneity of the number of new issues has been proposed as a potential explanation of this long-run underperformance. Under pseudo market timing of new issues, ex post measures of average abnormal returns may be negative on average despite zero ex ante abnormal returns. We show that, under reasonable stationarity assumptions on the process generating events, traditional measures of average abnormal returns are consistent, and the pseudo market timing effect is a small sample problem. In simulations of an empirical model we demonstrate that the bias is small even in moderate sample sizes. An abnormal return measure capturing a feasible investment strategy is not biased. We argue that it is unlikely that pseudo market timing is the explanation for the long-run underperformance in equity issuances.
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Bibliographic InfoPaper provided by Institute for Financial Research in its series SIFR Research Report Series with number 24.
Length: 38 pages
Date of creation: 01 Jun 2004
Date of revision:
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Abnormal return measures; Endogenous events; Event studies; Initial public offerings; Long-run underperformance;
Other versions of this item:
- 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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