Corporate financing decisions, managerial market timing, and real investment

• 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
• ISSN: 0304-405X; 1879-2774
• DOI: 10.1016/j.jfineco.2011.05.001

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.