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Pseudo Market Timing and Predictive Regressions

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  • Malcolm P. Baker
  • Ryan Taliaferro
  • Jeffrey Wurgler

Abstract

A number of studies claim that aggregate managerial decision variables, such as aggregate equity issuance, have power to predict stock or bond market returns. Recent research argues that these results may be driven by an aggregate time-series version of Schultz's (2003) pseudo market timing bias. We use standard simulation techniques to estimate the size of the aggregate pseudo market timing bias for a variety of predictive regressions based on managerial decision variables. We find that the bias can explain only about one percent of the predictive power of the equity share in new issues, and that it is also much too small to overturn prior inferences about the predictive power of corporate investment plans, insider trading, dividend initiations, or the maturity of corporate debt issues.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10823.

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Date of creation: Oct 2004
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Handle: RePEc:nbr:nberwo:10823

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  1. N. Gregory Mankiw & Matthew D. Shapiro, 1985. "Do We Reject Too Often? Small Sample Properties of Tests of Rational Expectations Models," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0051, National Bureau of Economic Research, Inc.
  2. Henderson, Brian J. & Jegadeesh, Narasimhan & Weisbach, Michael S., 2006. "World markets for raising new capital," Journal of Financial Economics, Elsevier, Elsevier, vol. 82(1), pages 63-101, October.
  3. Malcolm Baker & Jeremy C. Stein, 2002. "Market Liquidity as a Sentiment Indicator," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1977, Harvard - Institute of Economic Research.
  4. Owen Lamont, . "Investment Plans and Stock Returns."," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 488, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Malcolm Baker & Jeffrey Wurgler, 2004. "A Catering Theory of Dividends," Journal of Finance, American Finance Association, American Finance Association, vol. 59(3), pages 1125-1165, 06.
  6. Malcolm Baker & Jeffrey Wurgler, 1999. "The Equity Share in New Issues and Aggregate Stock Returns," Yale School of Management Working Papers, Yale School of Management ysm124, Yale School of Management, revised 01 Jan 2009.
  7. Dahlquist, Magnus & de Jong, Frank, 2004. "Pseudo Market Timing: Fact or Fiction?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4609, C.E.P.R. Discussion Papers.
  8. Ritter, Jay R., 2003. "Investment banking and securities issuance," Handbook of the Economics of Finance, Elsevier, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 5, pages 255-306 Elsevier.
  9. Alexander W. Butler & Gustavo Grullon & James P. Weston, 2006. "Can Managers Successfully Time the Maturity Structure of Their Debt Issues?," Journal of Finance, American Finance Association, American Finance Association, vol. 61(4), pages 1731-1758, 08.
  10. Paul Schultz, 2003. "Pseudo Market Timing and the Long-Run Underperformance of IPOs," Journal of Finance, American Finance Association, American Finance Association, vol. 58(2), pages 483-518, 04.
  11. Elliott, Graham & Stock, James H., 1994. "Inference in Time Series Regression When the Order of Integration of a Regressor is Unknown," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 10(3-4), pages 672-700, August.
  12. Owen A. Lamont, 2002. "Evaluating Value Weighting: Corporate Events and Market Timing," NBER Working Papers 9049, National Bureau of Economic Research, Inc.
  13. Lewellen, Jonathan, 2004. "Predicting returns with financial ratios," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(2), pages 209-235, November.
  14. repec:cup:etheor:v:10:y:1994:i:3-4:p:672-700 is not listed on IDEAS
  15. John Y. Campbell & Motohiro Yogo, 2002. "Efficient Tests of Stock Return Predictability," Harvard Institute of Economic Research Working Papers, Harvard - Institute of Economic Research 1972, Harvard - Institute of Economic Research.
  16. Amihud, Yakov & Hurvich, Clifford M., 2004. "Predictive Regressions: A Reduced-Bias Estimation Method," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 39(04), pages 813-841, December.
  17. Seyhun, H Nejat, 1992. "Why Does Aggregate Insider Trading Predict Future Stock Returns?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(4), pages 1303-31, November.
  18. Lakonishok, Josef & Lee, Inmoo, 2001. "Are Insider Trades Informative?," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 14(1), pages 79-111.
  19. Alexander W. Butler & Gustavo Grullon & James P. Weston, 2005. "Can Managers Forecast Aggregate Market Returns?," Journal of Finance, American Finance Association, American Finance Association, vol. 60(2), pages 963-986, 04.
  20. Polk, Christopher & Thompson, Samuel & Vuolteenaho, Tuomo, 2006. "Cross-sectional forecasts of the equity premium," Journal of Financial Economics, Elsevier, Elsevier, vol. 81(1), pages 101-141, July.
  21. Baker, Malcolm & Greenwood, Robin & Wurgler, Jeffrey, 2003. "The maturity of debt issues and predictable variation in bond returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 70(2), pages 261-291, November.
  22. Kothari, S. P. & Shanken, Jay, 1997. "Book-to-market, dividend yield, and expected market returns: A time-series analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 44(2), pages 169-203, May.
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Cited by:
  1. Amit Goyal & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," Yale School of Management Working Papers, Yale School of Management amz2412, Yale School of Management, revised 01 Jan 2006.
  2. Evgeny Lyandres & Le Sun & Lu Zhang, 2005. "Investment-Based Underperformance Following Seasoned Equity Offerings," NBER Working Papers 11459, National Bureau of Economic Research, Inc.
  3. Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.

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