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Is Market Timing Good for Shareholders?

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  • Ilona Babenko

    (W.P. Carey School of Business, Arizona State University, Tempe, Arizona 85287)

  • Yuri Tserlukevich

    (W.P. Carey School of Business, Arizona State University, Tempe, Arizona 85287)

  • Pengcheng Wan

    (W.P. Carey School of Business, Arizona State University, Tempe, Arizona 85287)

Abstract

Corporations often transact in their own mispriced stock. This activity, known as equity market timing , can generate substantial profits and increase the long-term stock price. We challenge a closely related popular view that market timing always benefits firm shareholders. Opportunistic financing maneuvers by a firm can negatively affect its uninformed stock owners because of adverse selection and the change in the firm’s short-term price, whereas the long-term returns do not accumulate to departing stockholders. The negative effect of market timing on stockholders increases with the share turnover. Furthermore, the effect of timing is asymmetric: shareholders prefer that the firm corrects underpricing rather than overpricing. Our theory can be used to better interpret the observed stock issuance and repurchase activities of firms.

Suggested Citation

  • Ilona Babenko & Yuri Tserlukevich & Pengcheng Wan, 2020. "Is Market Timing Good for Shareholders?," Management Science, INFORMS, vol. 66(8), pages 3542-3560, August.
  • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:8:p:3542-3560
    DOI: 10.1287/mnsc.2019.3359
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    References listed on IDEAS

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