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Pseudo Market Timing: Fact or Fiction?

Author

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  • Dahlquist, Magnus

    () (Swedish Institute for Financial Research)

  • de Jong, Frank

    () (University of Amsterdam)

Abstract

The 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.

Suggested Citation

  • Dahlquist, Magnus & de Jong, Frank, 2004. "Pseudo Market Timing: Fact or Fiction?," SIFR Research Report Series 24, Institute for Financial Research.
  • Handle: RePEc:hhs:sifrwp:0024
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    References listed on IDEAS

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    Cited by:

    1. Malcolm P. Baker & Ryan Taliaferro & Jeffrey Wurgler, 2004. "Pseudo Market Timing and Predictive Regressions," NBER Working Papers 10823, National Bureau of Economic Research, Inc.
    2. Nicholas Barberis & Ming Huang, 2008. "Stocks as Lotteries: The Implications of Probability Weighting for Security Prices," American Economic Review, American Economic Association, vol. 98(5), pages 2066-2100, December.
    3. Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Abnormal return measures; Endogenous events; Event studies; Initial public offerings; Long-run underperformance;

    JEL classification:

    • 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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