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Why does the change in shares predict stock returns?

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  • William R. Nelson

Abstract

The stock of firms that issue equity has, on average, performed poorly in subsequent years, while the stock of firms that repurchase has typically done well. One explanation for this pattern is that firms are exploiting their superior knowledge about the value of their stock by buying it when it is undervalued and selling it when it is overvalued. This paper presents supporting evidence for this explanation of the excess returns: The change in shares outstanding is positively correlated with proxies for the deviation of current stock prices from fundamental value; the excess returns following the change in shares remain significant after controlling for these proxies; and the changes in shares that can be explained by the proxies predict stock returns more powerfully than changes in shares explained by other reasons.

Suggested Citation

  • William R. Nelson, 1999. "Why does the change in shares predict stock returns?," Finance and Economics Discussion Series 1999-07, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:1999-07
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    References listed on IDEAS

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    Stock - Prices; Stocks;

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