Corporate financing decisions, managerial market timing, and real investment

Both market timing and investment-based theories of corporate financing predict under-performance after firms raise capital, but only market timing predicts that the composition of financing (equity compared with debt) should also forecast returns. In cross-sectional tests, we find that the amount o...

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Bibliographic Details
Published in:Journal of financial economics 2011-09, Vol.101 (3), p.666-683
Main Authors: Butler, Alexander W., Cornaggia, Jess, Grullon, Gustavo, Weston, James P.
Format: Article
Language:English
Subjects:
Abnormal returns
Business investment
Corporate finance
Corporate investment
Financing methods
Financing policy
Financing policy Corporate investment Market timing
Investments
Market timing
Scandals
Stock returns
Studies
Time series
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Summary:Both market timing and investment-based theories of corporate financing predict under-performance after firms raise capital, but only market timing predicts that the composition of financing (equity compared with debt) should also forecast returns. In cross-sectional tests, we find that the amount of net financing is more important than its composition in explaining future stock returns. In the time series, investment-based factor models explain abnormal stock performance following a variety of corporate financing events that previous studies link to market timing. At the aggregate level, the amount of new financing is also more important for future market returns than its composition. Overall, our joint tests reveal that measures of real investment are correlated with future returns and measures of managerial market timing are not.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2011.05.001