Institutional shareholders and SEO market timing

Pecking order and market timing theories assume that corporate financing decisions are made in the interests of existing shareholders. We find that existing institutional investors, on average, significantly increase their share ownership at the time of the SEO, including SEOs that would be classified as overpriced based on ex-ante measures of mispricing, such as pre-issue returns and market-to-book ratios. We further find that higher pre-existing institutional shareholdings lead to less SEO timing. Overall, the results question whether firms engage in equity timing to benefit existing shareholders at the expense of investors buying shares in the SEOs.     

The market timing of corporate bond reopenings

The objective of this paper is to test whether companies use corporate bond reopenings to exploit overvalued debt. Reopenings represent new debt offerings, which are characterized through identical configurations as an already outstanding bond, but with a market-adjusted price. Their advantage lies with the fact that fewer preparations are required compared to a new regular offering. For a set of European companies our results suggest that stockholders respond less positively to the announcements of reopenings than to regular offerings. This effect is stronger, the higher the pre-issue bond price run-up, and the stock price reaction is directly linked to the change in the firm’s debt value. Additionally, the prices of the reopened bonds drop on the announcement day. Therefore, in line with the window of opportunity theory, the firm’s management appears to use reopenings as a fast and inexpensive way to raise debt capital, which leads stockholders and bondholders to suspect an overvaluation and therefore to adjust their price expectations. The analysis also reveals that the redistribution of wealth from bondholders to stockholders is a major determinant for the observed price changes.     

A test of bear market mergerstat control premiums

This paper examines all 340 of the 2001 “bear market” acquisition announcements of U.S. target firms reported by Mergerstat/Shannon Pratt’s Control Premium Study^TM. This paper compares the “Control Premium” reported by Mergerstat/Shannon Pratt’s Control Premium Study^TM to a comparable “Cumulative Abnormal Return”(CAR) calculated using event study methodology. While the average total “Control Premium” reported by Mergerstat differed by only −3.45% from the event study CAR, significant differences presented themselves when the event period was broken down between the day −63 to −1 “runup” period and the day 0 to end “markup” period.      

A multivariate nonparametric test for return and volatility timing

This paper develops a novel approach to simultaneously test for market timing in stock index returns and volatility. The tests are based on the estimation of a system of regression equations with indicator variables and provide detailed information about the statistical significance of alternative market timing components.     

A market test of investor reaction to disagreements

The SEC currently requires that firms disclose recent disagreements with their auditors over accounting or auditing matters when a change in auditor is reported. The effectiveness and usefulness of requirements to disclose disagreements have been questioned, and previous empirical research on the issue has been inconclusive. This study investigates the information content of disclosure of the auditor-firm disagreements. The analysis indicates a significant negative market reaction in the week that the Form 8-K is filed with the SEC. This finding is consistent with the position that the disclosure provides information useful to investors.     

Controlling shareholders and market timing in share issuance

We examine market timing in the equity issuance of firms controlled by large shareholders using a hand-collected data set of controlling shareholders' ownership stakes in Chile between 1990 and 2009. When a firm issues shares, the controlling shareholder can either maintain or change his ownership stake depending on how many of the new shares he subscribes. Issuance predicts poor future returns and is preceded by high returns, but only when the controlling shareholder's stake is significantly reduced. Consistent with market timing, the results are stronger in the absence of institutional investors and in hot issuance markets.     

Managerial motivation and timing of open market share repurchases

There are two major mechanisms by which managers distribute cash to shareholders: through dividends and share repurchases. Historically, dividends have been the preferred method, but in recent years, share repurchases have become more popular, with more firms using repurchases than dividends to distribute cash. During the sample period of 2004–2006, 6.5 billion shares were repurchased for a total dollar volume amount of $222 billion. Using a unique dataset on actual monthly share repurchases, this paper investigates when and why managers repurchase shares in the open market. The paper finds evidence that firms which make repurchases are jointly timing their repurchases to perceived undervaluation and the presence of discretionary cash flow. In addition, the paper finds evidence which supports that (1) firms in competitive industries tend to repurchase less, (2) firms tend to substitute repurchases for anti-takeover provision adoption, and (3) firms attempt to manage earnings upward through the use of repurchases.     

The predictability of real estate returns and market timing

Recent evidence suggests that all asset returns are predictable to some extent with excess returns on real estate relatively easier to forecast. This raises the issue of whether we can successfully exploit this level of predictability using various market timing strategies to realize superior performance over a buy-and-hold strategy. We find that the level of predicability associated with real estate leads to moderate success in market timing, although this is not necessarily the case for the other asset classes examined in general. Besides this, real estate stocks typically have higher trading profits and higher mean risk-adjusted excess returns when compared to small stocks as well as large stocks and bonds even though most real estate stocks are small stocks.     

Theory of the dominant firm: A capital market test

This study provides a test of dominant firm theory by examining earnings-induced information transfers within industries that have a dominant firm. Based on the economic asymmetries between dominant and fringe firms, it is posited that the earnings announcements of dominant firms will act as an industry bell, resulting in a positive association between the unexpected earnings of the dominant firm and the security price changes of the fringe firms. Due to their position as industry followers, the earnings announcements of the fringe firms are not expected to affect the security prices of the dominant firm. The results of empirical tests are generally consistent with dominant firm theory.     

Equity market timing and capital structure: International evidence

We investigate the equity market timing hypothesis of capital structure in major industrialized (G-7) countries. As claimed by its proponents, we find that leverage of firms is negatively related to the historical market-to-book ratio in all G-7 countries. However, this negative relationship cannot be attributed to equity market timing. We find no association between equity issues and market-to-book ratios at the time of equity financing decisions by Japanese firms. Firms in all G-7 countries, except Japan, undo the effect of equity issuance and the impact of equity market timing attempts on leverage is short lived. This is inconsistent with the prediction of the equity market timing hypothesis and more in line with dynamic trade-off model.     

Seasoned equity offerings,market timing,and the corporate lifecycle

Both a firm's market-timing opportunities and its corporate lifecycle stage exert statistically and economically significant influences on the probability that it conducts a seasoned equity offering (SEO), with the lifecycle effect empirically stronger. Neither effect adequately explains SEO decisions because a near-majority of issuers are not growth firms and the vast majority of firms with high M/B ratios and high recent and poor future stock returns fail to issue stock. Since without the offer proceeds 62.6% of issuers would run out of cash (81.1% would have subnormal cash balances) the year after the SEO, a near-term cash need is the primary SEO motive, with market-timing opportunities and lifecycle stage exerting only ancillary influences.     

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 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.     

Strategic timing of annual earnings announcements: evidence from an order-driven market

Using Spanish data, this paper examines, for the first time, the differences in the intraday response of an order-driven market to earnings announcements made during trading and non-trading hours. We show that the speed of reaction depends on timing of the announcement: for overnight (daytime) announcements, the improvement in liquidity is (not) immediate. This finding could explain why Spanish firms prefer to release the bad (good) earnings announcement in trading (non-trading) hours. This strategic timing differs from the traditional disclosure policy in American markets, suggesting that different microstructures may react differently to news releases and, consequently, drive the strategic timing of corporate disclosures.

Public market staging: The timing of capital infusions in newly public firms

We examine financing activities of newly public firms for evidence on capital staging in the public equity market. Staging (sequential financing) can increase issuance costs but can limit costs associated with overinvestment. We find evidence consistent with the hypothesis that staging is employed to help control the overinvestment problem in public firms. Initial public offering (IPO) proceeds, relative to external financing requirements, are smaller for firms with more intangible assets and more research and development (R&D)-intensive firms. Asset intangibility and R&D intensity are also both negatively related to the length of time from a firm's IPO to its first post-IPO capital infusion.     

An empirical test of the efficiency of the ADR market

This study examines the weak form efficiency of foreign equities — American Depository Receipts — traded in the U.S. The results of serial correlation and runs tests on a sample of listed and NASDAQ ADRs for the years 1974–1978 were consistent with weak form efficiency.     

Trading based on forecasts of earnings per share: A test of the efficient market hypothesis

In this paper the semi-strong form of the efficient market hypothesis is tested with a trading rule based on Box-Jenkins forecasts of earnings per share numbers. The quarterly earnings per share series are modeled for a number of firms. The models are updated quarter by quarter and investments are made in the stocks with the largest forecasted growth rates for the next quarter. The risk-adjusted performance of such a strategy is shown to be inconsistant with semi-strong market efficiency.     

Sudden crash or long torture: The timing of market reactions to operational loss events

An emerging literature investigating market responses to operational loss announcements concludes that financial markets tend usually to overreact to loss events. This overreaction is commonly interpreted as reputational damage. We revisit this issue by focusing on the timing of markets’ reactions and highlight two variables: the start and the speed of stock markets’ responses. It appears that when operational losses are caused by internal fraud the negative market reaction materializes earlier and faster. Industry sectors and prevailing market conditions influence the timing of market reactions as well. Our empirical findings reveal moreover that a higher initial grading of the company is associated with a later stock market reaction to the announcement. While the relative magnitude and the length of markets’ overreactions is positively correlated to the concomitant downgrading our study shows that overreaction magnitudes are also strongly correlated to our estimate of the total duration of the reaction.     

Tests of rationality,neutrality and market efficiency: A Monte Carlo analysis of alternative test statistics

This paper examines the small sample properties of three testing strategies used to analyze the rationality, monetary neutrality and market efficiency hypotheses. We focus on the original ‘two-step’ Barro test of the MRE hypothesis formed entirely from OLS results, a test that employs the correct variance-covariance formulae for these ‘two-step’ estimates, and Mishkin's FIMLE testing framework. Each test is examined under likely model respecifications. The findings highlight the extensive bias incurred by drawing inferences from simple unadjusted ‘two-step’ estimates and reveal the relative power of all tests in identifying alternatives to the null hypotheses.     

Glamour versus value,market timing and firm performance: evidence from mergers and acquisitions

This study examines the performance of glamour versus value firms in M&As. Specifically, the current study takes into account the market timing to explore the performance of glamour versus value firms in M&As. Using the standard event study methodology with 1109 targets and 6980 bidders during the 2000–2013 period, the results show that glamour (value) firms are more likely to choose the hot (cold) market condition to engage in M&As for both targets and bidders. The evidence also reveals that the performance of glamour versus value firms is less sensitive to the market timing for targets. While glamour bidding firms obtain lower announcement returns, the losses are even more significant during long run post-announcement period. A further analysis indicates that bidders in general experience negative announcement returns in the hot market irrespective of glamour versus value firms. While glamour bidding firms obtain lower post-announcement returns in the hot market relative to their value counterparts, glamour bidders generate higher post-announcement returns during the cold market than value bidders. The regression analysis finds consistent results for bidders. Overall, this study sheds lights on the importance of the market timing on the performance of glamour versus value firms in M&As.