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Optimal Market Timing

  • Erica X. N. Li
  • Dmitry Livdan
  • Lu Zhang
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We use a fully-specified neoclassical model augmented with costly external equity as a laboratory to study the relations between stock returns and equity financing decisions. Simulations show that the model can simultaneously and in many cases quantitatively reproduce: procyclical equity issuance; the negative relation between aggregate equity share and future stock market returns; long-term underperformance following equity issuance and the positive relation of its magnitude with the volume of issuance; the mean-reverting behavior in the operating performance of issuing firms; and the positive long-term stock price drift of firms distributing cash and its positive relation with book-to-market. We conclude that systematic mispricing seems unnecessary to generate the return-related evidence often interpreted as behavioral underreaction to market timing.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12014.

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Date of creation: Feb 2006
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Handle: RePEc:nbr:nberwo:12014
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