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Security Issue Timing: What Do Managers Know, and When Do They Know It?

  • DIRK JENTER
  • KATHARINA LEWELLEN
  • JEROLD B. WARNER

We study put option sales undertaken by corporations during their repurchase programs. Put sales' main theoretical motivation is market timing, providing an excellent framework for studying whether security issues reflect managers' ability to identify mispricing. Our evidence is that these bets reflect timing ability, and are not simply a result of overconfidence. In the 100 days following put option issues, there is roughly a 5% abnormal stock price return, and the abnormal return is concentrated around the first earnings release date following put option sales. Longer term effects are generally not detected. Put sales also appear to reflect successful bets on the direction of stock price volatility.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 66 (2011)
Issue (Month): 2 (04)
Pages: 413-443

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Handle: RePEc:bla:jfinan:v:66:y:2011:i:2:p:413-443
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  1. James J. Angel & Gary L. Gastineau & Clifford J. Weber, 1997. "Using Exchange-Traded Equity "Flex" Put Options In Corporate Stock Repurchase Programs," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(1), pages 109-113.
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  8. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  9. Gyoshev, Stanley & Kaplan, Todd R. & Szewczyk, Samuel & Tsetsekos, George, 2012. "Why Do Financial Intermediaries Buy Put Options from Companies?," MPRA Paper 43149, University Library of Munich, Germany.
  10. Gustavo Grullon & Roni Michaely, 2004. "The Information Content of Share Repurchase Programs," Journal of Finance, American Finance Association, vol. 59(2), pages 651-680, 04.
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