Paper_Agency Implications of Equity Market Timing

Agency Implications of Equity Market Timing

Ilona Babenko, Yuri Tserlukevich, and Pengcheng Wan∗

August 14, 2012

Abstract

We develop a rational expectations model to examine the conflicts of interest

between different groups of shareholders in firms’ market timing decisions. We

show that current shareholders benefit from share repurchase timing, whereas future

shareholders prefer issuance timing. Using a new empirical measure that captures

the additional returns to shareholders from equity sales and stock repurchases, we

document that managers of large firms time the market primarily through stock

repurchases and are rewarded with higher compensation when they beat the market.

In contrast, managers of small firms appear to cater more to future shareholders in

their market timing decisions.

JEL codes: G30, G32, G35

∗The authors are in the Department of Finance, Arizona State University, [email protected],[email protected], [email protected], phone 480-965-7281. We thank Baozhang Yang (FIRS dis-cussant), Javed Ahmed, Oliver Boguth, Michael Faulklender, Michael Hertzel, Vincent Glode, the partic-ipants in the 2012 Financial Intermediation Research Society Meeting and the seminar at Arizona StateUniversity. The paper has been accepted for presentation at the American Finance Association Meetingin 2013.

1

Equity market timing has received much attention in recent academic articles. The

general consensus in the literature is that market timing of share repurchases and equity

sales is widespread and profoundly affects firm financing, capital structure, mergers and

acquisitions, and other corporate decisions.1 It is further suggested that skillful managers

should engage in a dynamic equity timing strategy, exploiting both underpricing and

overpricing of their firms’stock. But is dynamic policy always consistent with maximizing

shareholder value? Do repurchases of undervalued shares and issuances of overpriced

shares have the same effect on current and future firm shareholders? And are managers

rewarded financially for successful market timing?

We address these questions through a simple model of market timing built on the

rational expectations framework of Grossman (1976). Contrary to casual intuition, we

show that a firm buying back undervalued shares takes advantage primarily of incoming

shareholders, whereas a firm issuing overvalued shares exploits selling shareholders. Our

starting point is that, absent any actions by a firm, shareholders trade in firm stock

without knowledge of over- or underpricing. The key is then to compute the changes

in expected shareholder gains or losses associated with informed trading by the firm.

For example, shareholders who happen to sell stock when it is overvalued benefit from

mispricing. However, when the firm issues additional shares to take advantage of stock

overvaluation, both the price and the quantity of shares sold by these shareholders is

lower, resulting in a negative expected change in their wealth.

In the model, a firm manager is endowed with private information, long-term share-

holders are passive, and selling and incoming shareholders can learn from the firm’s de-

1For example, managers admit to market timing considerations affecting corporate decisions (Grahamand Harvey (2001)), high valuation firms use their own equity as inflated acquisition currency for takeovers(Shleifer and Vishny (2003)), market timing has a persistent effect on firm capital structure (Baker andWurgler (2002)), and a model with market timing better fits the time-series of the data (Waruswitharanaand Whited (2011)). Additionally, a large empirical literature documents abnormal stock return patternsaround corporate events that could be symptomatic of market timing by firm managers (see, e.g., Jenter,Lewellen, and Warner (2011), Ikenberry, Lakonishok, and Vermaelen (1995), Loughran and Ritter (1995),and Mikkelson and Partch (1986)).

2

cisions and trade their stock accordingly. Short-term shareholders diversify their existing

holdings and prefer to sell the stock absent new information, whereas incoming share-

holders prefer to buy the stock. Because some firms in the economy issue or repurchase

equity for non-informational reasons, the equilibrium is not fully revealing and informed

managers can take advantage of stock mispricing. The equilibrium price and quantities

traded by each group of investors are determined by a market clearing condition.

The model highlights two separate effects of equity market timing on shareholders.

First, the price effect appears because a firm’s decision conveys new information to the

market. Stock repurchases tend to raise the stock price; equity sales lead to a price

decline. Second, the quantity effect appears because a firm’s trading creates additional

demand for or supply of shares. The resulting imbalance in trades must be absorbed, by

definition, by either selling or incoming shareholders. This result implies, for example,

that selling shareholders sell fewer shares when the firm makes a seasoned equity offering

(SEO). We show that because of the price and quantity effects, incoming shareholders are

worse off from the firm’s timing repurchases and selling shareholders are worse offbecause

of timing new equity sales. Finally, since losses for any group of shareholders must add up

to a net gain for other shareholders, we conclude that current shareholders unambiguously

benefit from equity timing with stock repurchases, whereas future shareholders prefer that

managers time equity sales.

Determining how different shareholder groups are affected by firms’market timing is

interesting in and of itself, but it can also shed light on the objective functions of firm

managers. Specifically, by observing managers’market timing strategies, it is possible

to infer whether managers are trying to create value for the firm’s current or future

shareholders. To answer this question, we construct a new empirical measure of market

timing that captures the additional return earned by long-term shareholders because

3

of a stock issuance or repurchase.2 The complication is that, by its very nature, the

stock return that would be realized had the firm not issued or repurchased any stock

is unobservable. We overcome this diffi culty by assuming that all stock mispricing is

corrected in the long term and by backing out the necessary information from the realized

stock returns and net equity issuance by the firm. This procedure gives us a simple and

intuitive measure of market timing. For example, to calculate the repurchase timing

measure, we multiply the post-repurchase one- or three-year risk-adjusted return by the

fraction of repurchased shares. For equity issuance, we create two similar measures based

on seasonal equity offerings and total equity issuance.

Overall, we find that market timing is prevalent in our sample. For example, the

average additional return created for long-term shareholders by SEOs is 0.45% per year

(t-stat = 2.28) or 3.21% over a three-year horizon (t-stat = 8.32). Importantly, there

is a difference in the market timing strategies of different-sized firms. Large firms, on

average, show a higher propensity to time their stock repurchases and seem to issue new

equity in a way that is unrelated to future valuation. In contrast, small firms are much

more successful in timing equity sales. Given the predictions of the model, this evidence

suggests that the managers of small firms try to maximize the value of future shareholders,

whereas managers of large firms try to create value for existing shareholders. Although

we do not attempt to model the corporate lifecycle, it is possible that because small firms

plan to grow in the future they are looking to “leave a good taste in investors’mouths”in

the words of Allen and Faulhaber (1989). Our findings also suggest that the assumption

that managers maximize the weighted average of the short-term and long-term prices is

more applicable to large firms (see, e.g., the signaling models of Miller and Rock (1985)

and Leland and Pyle (1977)).

2Using conventional measures, such as market-to-book ratio in Baker and Wurgler (2002), does notallow us to quantify the shareholder wealth transfers or to separate the additional returns from issuancesand repurchases.

4

Managers who succeed at equity timing are surely heaped with praise, but they can

also benefit financially. In their survey of firms’CFOs, Brav et al. (2005) found that at

least some firms claim to reward the people who implement the firm repurchase policy and

“beat the market.”Further, our model suggests that, if managerial pay is set by current

shareholders, executive compensation should increase with well-timed stock buybacks and

be lower when the firm times equity sales. Using the executive compensation data on large

firms for the period 1992-2010, we confirm that firms’CEOs are rewarded for successfully

timed stock buybacks. A one standard deviation in the timing measure is associated

with a 2.59% increase in CEO compensation in the following year. In contrast, CEOs

who successfully time equity sales earn statistically lower compensation. Our results

seem to be driven primarily by adjustments of bonuses and, to a lesser degree, new

grants of equity-based compensation. In all specifications, we include firm fixed effects to

account for unobserved firm heterogeneity and control for past and contemporaneous stock

returns, as well as the fraction of equity repurchased. Thus, our results cannot be simply

attributed to stock return patterns around equity issuance and repurchase decisions or

managers being compensated for higher payout.

The rest of this paper is organized as follows. The next section provides a brief overview

of the literature. Section 2 presents a simple model of equilibrium equity pricing in the

presence of informed trading by a firm and analyzes wealth transfers between different

groups of shareholders. The data sources and empirical results are described in Section

3. The final section offers concluding remarks.

5

1 Literature Overview

Our paper is related to the large literature documenting equity mispricing around corpo-

rate stock issuance and repurchase decisions.3 For example, Loughran and Vijh (1997)

find the negative price drift of firms that complete stock mergers; Ikenberry, Lakonishok,

and Vermaelen (1995, 2000) document positive abnormal returns following the announce-

ment of open market share repurchases;4 and Loughran and Ritter (1995, 1997) provide

evidence on the underperformance of firms conducting IPOs and SEOs. Khan, Kogan,

and Serafeim (2012) identify a setting with overvaluation exogenous to the firm and find

support for firms timing their SEOs, whereas Pontiff and Woodgate (2008) document that

share issuance exhibits a strong cross-sectional ability to predict stock returns. Baker,

Wurgler, and Ruback (2007) provide an overview of this literature and describe some of

the advantages and challenges in using the market-to-book ratios and post-event returns

as measures of stock mispricing. We contribute to this line of research by developing a

new measure of market timing and documenting the differences in timing strategies of

large and small firms.

Most of the previous papers do not consider the welfare implications of market timing

for different groups of a firm’s shareholders, which is at the heart of our theoretical

analysis. One notable exception in the literature is Brennan and Thakor (1990), who show

that repurchases lead to a wealth transfer from uninformed to informed shareholders.

They further argue that since the costs of gathering information are larger for small

shareholders, a repurchase is expected to benefit large shareholders. Unlike in Brennan

and Thakor (1990), in our model all shareholders (but not the manager) have symmetric

information. Since shareholders have different motives for trading, our work also shares

3Earlier theoretical work shows why deviations from effi cient prices can persist in equilibrium if arbi-trageurs are risk-averse, leveraged, or manage other people’s money (Shleifer and Vishny (1997)).

4Babenko, Tserlukevich, and Vedrashko (2012) show that this drift is more pronounced when insidersbuy the company stock prior to the repurchase announcement.

6

features with Huang and Thakor (2011), who develop and test the explanation for share

repurchases as a mechanism to remove pessimistic shareholders.

Our model has its roots in the theoretical signaling literature. For example, Vermae-

len (1981) and Ofer and Thakor (1987) show that stock repurchases can signal positive

information to investors, whereas Myers and Majluf (1984) illustrate why stock issuances

convey negative news. Constantinides and Grundy (1989) describe the signaling equi-

librium, in which the firm issues a security and uses proceeds to partially finance stock

repurchases. Dynamic signaling is also explored in a number of recent papers.5 As in

Myers and Majluf (1984), firms’actions in our model convey information to the market,

and managers maximize long-term value.

We assume that the manager has superior information regarding firm value. Some of

the earlier articles argue that equity timing can also originate from differences in beliefs

between managers and investors. For example, Jenter (2005) finds that managers’per-

ceptions of fundamental value systematically diverge from market valuations, while Yang

(2011) demonstrates that differences of opinion can have implications for capital struc-

ture.6 Additionally, firms may appear to time their equity issuances because of changing

financing or investment opportunities, even if the information is symmetric.7 Finally,

waves of stock repurchases and issuances can also be a result of firms taking advantage of

aggregate market mispricing or reacting with their investment decisions to the change in

5For example, Hennessy, Livdan, and Miranda (2010) build a dynamic equity signaling model, fea-turing new equity issues and repurchases, in which the firm can completely avoid equity mispricing. Intheir model, signaling is achieved through higher leverage and, consequently, higher bankruptcy costs.Morellec and Shurhoff (2011) show that in the presence of adverse selection early exercise of investmentoptions can serve as a positive signal and allow the firm to issue securities at a fair price.

6In Yang’s model, there is no asymmetric information, but the manager and outside investors “agree todisagree”on firm value. Since outside shareholders set the stock price, and the manager makes all of thefinancing decisions, market timing in his framework can lead to firm value loss and has rich implicationsfor capital structure.

7Bolton, Chen, and Wang (2012) build a dynamic model with time-varying external costs of financingand show that firms can exploit the opportunity to issue equity at a lower cost. Similarly, Li, Livdan,and Zhang (2009) model timing of equity financing decisions within a neoclassical q-theory frameworkand draw conclusions about expected stock returns.

7

the business environment. An example of this is the work of Dittmar and Dittmar (2008),

who relate aggregate issuance and repurchase activity to the business cycle.

2 MODEL

2.1 Setup

To guide and motivate our empirical analysis, we build a simple model based on the ra-

tional expectations framework of Grossman (1976). The economy is populated with a

proportion λ of firms that are controlled by informed managers who are able to time the

market (“timing firms”), and a proportion 1 − λ of other firms that sell and repurchase

equity for reasons that are unrelated to misvaluation. For example, firms can repurchase

stock to distribute excess cash, manage earnings, adjust leverage, or counteract the di-

lution from employee stock options (Grullon and Michaely (2002), Skinner (2008), and

Babenko (2009)). Similarly, new equity issuance can be motivated by the need to finance

new investment.8 We assume that investors, who observe the stock price and managers’

actions, are unable to distinguish between the two types of firms, and thus the equilibrium

price does not fully adjust to the news about repurchases and equity issuances.

The model has three dates: 0, 1, and 2. Each timing firm is endowed with a risk-

neutral manager who receives private information at date 0. Based on this information,

she can trade on the firm’s behalf at date 1 with the objective of maximizing trading

profit. Following most of the literature (e.g., Morellec and Shuerhoff (2011)), we assume

that the manager does not tender her own shares during a repurchase and also does not

participate in a seasoned equity offering.

8For example, DeAngelo, DeAngelo, and Stulz (2010) find that, without SEO offer proceeds, 63% ofissuers would run out of cash the year after the SEO. Additionally, Hertzel, Huson, and Parrino (2012)find that timing of SEOs can be determined by market perception of potential overinvestment problem,as opposed to equity mispricing.

8

At date 0, the firm is owned by shareholders, some of which may decide to liquidate

their holdings at date 1 (we call this group “short-term shareholders”). Additionally, a

group of new shareholders can decide to buy the company stock at date 1 (“incoming

shareholders”). The remaining shareholders are passive and hold the stock until date 2

(“long-term shareholders”).

We assume that the long-term (fundamental) value of the firm is drawn from the

normal distribution

P2 ∼ N(P0, σ2p). (1)

The manager has a noisy signal v about the long-term firm value

v = P2 + ε, where ε ∼ N(0, σ2ε), (2)

and can use this information to buy or sell stock for the firm. The manager is strategic

(i.e., she takes into account the effect of her trade on the stock price) and maximizes the

expected profit from trading F shares, conditional on her signal

maxF

E [(P2 − P1 (F ))F |v] . (3)

All shareholders and potential investors can observe the market-clearing price and the

firm’s decision to repurchase or issue equity.9 We conjecture that the equilibrium price is

linear in the firm’s order size F

P1 = P0 + βF, (4)

and solve for parameter β later in the equilibrium. Positive trades by the firm indicate

9In practice, investors may not always be able to observe the firm’s issuance and repurchase decisions.For example, the information on stock buybacks used to be limited to announcements of future intentionsto repurchase stock and is now reported with a significant delay in 10-K and 10-Q forms. Whetherinvestors observe repurchases and equity issuances is not crucial in our model since investors can inferthe same information from the market price.

9

stock buybacks, F > 0, whereas negative trades capture stock issuances.

Finally, we assume that all shareholders are risk-neutral and maximize their expected

profits net of adjustment costs. Specifically, the objective functions of the short-term and

incoming shareholders are given by,

maxXs

Xs (E (P2|F )− P1)−θs2

(Xs −Qs)2 , (5)

maxXi

Xi (E (P2|F )− P1)−θi2

(Xi −Qi)2 . (6)

where Qi > 0 and Qs < 0.10 The important assumption modeled here implicitly is that

the demand for shares is finite in equilibrium and is a decreasing function of price.11

Downward-sloping demand functions can be justified by the heterogeneously held share-

holders’beliefs (see, e.g., Huang and Thakor (2011)), the structuring of investor trades

through the limit order book (Biais, Hillion, and Spatt (1995)), or the firm’s stock having

no close traded substitutes (Wurgler and Zhuravskaya (2002)). Additionally, Greenwood

(2005) and Shleifer (1986) provide compelling empirical evidence of downward-sloping

demand functions.

The following proposition describes the equilibrium.

Proposition 1 If λ < 1/2, the rational expectations equilibrium exists. The equilibrium

price is given by

P1 = P0 + βF, (7)

10For example, absent information reasons to trade, short-term shareholders may desire to sell thestock for liquidity reasons, whereas incoming shareholders might buy the stock in order to diversify theirholdings.11An alternative way to capture the same intuition is by considering investors with mean-variance

preferences, as in Grossman (1976). We adopt the former approach mainly for tractability purposes. Theresults of the alternatively specified model, in which investors maximize CARA utility, are available fromthe authors upon request.

10

where

β =1

1− 2λ

θsθiθs + θi

. (8)

The intuition for (7) is as follows. If the firm places a positive order for stock, the

equilibrium price increases since investors infer that with some probability the order is

coming from an informed manager and thus signals positive information. The sensitivity

of price to the firm’s order flow is positive whenever equilibrium exists, and it increases

with the proportion of timing firms in the economy. Note that sensitivity is positive even

if shareholders cannot infer any information from the price or from the firm’s trades (e.g.,

when λ → 0) simply because the market must clear; however sensitivity becomes larger

as investors learn.

We now analyze the implications of market timing for the wealth of different groups

of shareholders.

Proposition 2 Short-term and incoming shareholders are worse off when a firm engages

in market timing. The proposition holds irrespective of whether we measure the welfare of

shareholders by wealth or by utility functions, as in (5) and (6).

Intuitively, the manager is informed and acts in the interest of long-term shareholders.

Long-term shareholders therefore benefit at the expense of other investors, who can only

imperfectly infer the managerial signal. The next proposition establishes our central result

on the effect of market timing with share repurchases and equity sales.

Proposition 3 Short-term shareholders are worse off from market timing with equity

issuances. The incoming shareholders are worse off from market timing with repurchases.

The proposition holds irrespective of whether we measure the welfare of shareholders by

wealth or by utility functions, as in (5) and (6).

11

In general, there might be two effects on shareholders of trading by an informed firm: a

quantity effect and a price effect. The quantity effect appears if some shareholders change

their demand for stock as a result of the firm’s timing actions. For example, demand can

be affected because of the market’s need to clear additional trades by the firm or because

agents infer information from the firm’s decisions. The price effect arises whenever the

firm’s timing actions change the equilibrium stock price and shareholders buy or sell stock

at this new price.

Consider, for example, short-term shareholders who are negatively affected by the

timing of equity sales. When the firm issues equity, short-term shareholders can sell fewer

of their own shares and this decreases their expected profit since the stock is overpriced.

Additionally, because an equity sale by the firm conveys negative information to the

market, short-term shareholders end up selling shares at a lower price. In contrast, the

effect of repurchase timing on short-term shareholders can be ambiguous since the price

and quantity effects go in opposite directions.

We finally note that the intuition for shareholder wealth implications is preserved even

if the firm’s repurchase and issuance decisions are unobservable, although wealth transfers

are smaller in this case. This could be seen by considering a limiting case in Proposition

1 when the number of timing firms goes to zero, λ→ 0.

Before we proceed to the next result, it is convenient to separate all firm investors

into two groups. Specifically, we define “current shareholders” as long- and short-term

shareholders, and “future shareholders” as long-term and incoming shareholders. The

following corollary describes the wealth implications for these two groups of shareholders.

Corollary 1 The expected wealth of current shareholders increases with share repurchase

timing. The expected wealth of future shareholders increases with equity issuance timing.

This result follows immediately from Proposition 3 once we recognize that the gains

12

and losses of all firm investors sum to zero. For example, if the short-term shareholders

experience a loss, it must be that the long-term and incoming shareholders are collectively

better off. Therefore, we conclude that managers will time the equity market with repur-

chases only insofar as doing so increases the welfare of the firm’s existing shareholders.

Similarly, managers will time new equity issuances if their objective is to maximize the

value of future shareholders.

3 Empirical Analysis

We next proceed to the development and testing of the main empirical implications of

the model. First, we introduce a new measure of market timing to empirically assess

the success of market timing strategies. Second, we infer from the data whether firm

managers tend to maximize the value of current or future shareholders. The model shows

that the manager working purely in the interests of long-term shareholders has incentives

to use both equity issuances and repurchases. Timing of stock buybacks makes current

shareholders relatively better off, whereas timing of equity sales benefits future sharehold-

ers. We therefore attempt to determine managers’true objectives by looking at whether

they time the market primarily on the repurchase or the share issuance side. Finally, we

examine whether CEO pay is influenced by the success and nature of past market timing

strategies.

3.1 Data

Our sample includes the universe of Compustat firms with non-missing balance sheet data

for the period 1992-2010.12 Following Stephens and Weisbach (1998), we proxy for share

repurchases by the monthly decreases in split-adjusted shares outstanding reported by

12The first year of the sample is determined by the availability of the executive compensation data thatwe use in our tests.

13

CRSP. This method implicitly assumes that the firm has not repurchased any shares if

the number of shares increased or remained the same during the month. We take the last

day of the month as the repurchase date and calculate the stock return over a horizon

of either one or three years from that date. The fraction of shares repurchased in each

month is the number of shares repurchased during the month divided by the number of

shares outstanding at the end of the previous month.

A potential issue with this measure is that it tends to underestimate the amount of

true share repurchases (see, e.g., Jagannathan, Stephens, and Weisbach (2000)). For

example, if a company buys back stock and issues equity during the same month, we can

record a zero repurchase. This becomes particularly important for small firms since they

tend to issue more equity though broad-based equity compensation programs (Bergman

and Jenter (2008)) and also do more SEOs. We therefore also employ a commonly used

alternative approach to calculate the actual repurchases by using the Compustat data on

the total dollar value spent on repurchases. These data are only available at the quarterly

and annual frequencies and can contain some information unrelated to repurchases of

common stock (see, e.g., Kahle (2002) and Banyi, Dyl, and Kahle (2008)). Nevertheless,

the advantage of Compustat repurchase data is that they should not be systematically

understated for small firms and provide the least biased estimate of true repurchases

(Banyi, Dyl, and Kahle (2008)). To calculate the number of shares repurchased each

quarter using Compustat data, we follow Jagannathan, Stephens, and Weisbach (2000)

and divide the total dollar amount spent on repurchases during a quarter by the average

monthly stock price.

The sample of SEOs is from the Securities Data Company (SDC) new issues database.

We look only at primary issues of common stock. Although the SDC database provides

the exact stock issuance date, we use the last day of the calendar month as the issuance

date in calculating the one-year and three-year stock returns after an SEO. This procedure

14

ensures that post-SEO stock returns are directly comparable to post-repurchase returns.

We also compute the new equity issuances using the changes in the number of shares

outstanding. Similar to the calculation of our repurchase measure, we track the increases

in the total number of shares each month. The advantage of this measure is that it

captures, in addition to SEOs, other ways in which firms sell shares, such as private

placements, mergers and acquisitions, convertible debt and warrant exercises, direct pur-

chase plans, rights, and employee stock option exercises. According to Fama and French

(2005), the issuance of stock through SEOs constitutes only a small fraction of the total

issuance activity, and is smaller in magnitude than the issuance of stock due to merg-

ers financing or employee stock-based compensation plans.13 Additionally, Shleifer and

Vishny (2003) present a model showing how rational managers can use stock as a means of

payment in mergers and acquisitions to take advantage of stock mispricing, and Loughran

and Vijh (1997) find evidence of negative long-run abnormal returns for bidders making

stock acquisitions. In contrast, the advantage of looking only at the SEO data is that

market timing of SEOs should be more pronounced than for other equity issuances since

the manager is likely to have more control over these events.

Finally, we use the compensation data on firms’CEOs from the Standard and Poor’s

Execucomp database. Since executive compensation variables tend to be highly skewed,

we define the total CEO pay as the logarithm of the total annual CEO compensation

adjusted for inflation.

3.2 Market Timing Measures

Our measures of market timing aim to capture the additional risk-adjusted return earned

by a firm’s long-term shareholders because of equity market timing. For each month, we

13For example, Fama and French (2005) report that approximately 86% percent of all firms issued someform of equity over the period 1993 to 2002. This number contrasts sharply with the low frequency ofSEOs over the same period.

15

calculate the proportion of equity repurchased during a month, αi, and then multiply it

by either one- or three-year post-repurchase risk-adjusted returns, ri. We then sum the

resulting measures over the 12 months of the year to obtain the total,

Repurchase timing =12∑i=1

αiri. (9)

For example, if a manager buys back 5% of the firm’s outstanding shares in May, and

shares appreciate by 10% from June to May of the following year, the measure of repur-

chase timing will be equal to 0.5%. Sales timing is defined in a similar manner, with the

difference that we track the proportion of equity sold each month, si.

Sales timing = −12∑i=1

siri. (10)

Note that timing measures can be positive or negative, with larger positive values

indicating more successful timing by the firm. For firms that neither issue nor repurchase

any stock during the year, the timing measures are set to zero.

Although the construction of our market timing measures may seem intuitive, their

interpretation requires a deeper discussion. Intuitively, the additional return earned by

long-term shareholders because of market timing is given by the difference between the

realized stock return and the return that would be seen had the firm not issued or re-

purchased any stock. By its very nature, the latter return is unobservable, but it can be

inferred from the realized return and the cash going out (into) the firm in stock repurchase

(issuance).

Specifically, consider a manager who repurchases a fraction α of its stock at today’s

price P1 expecting the stock to appreciate to P ′2 in the future. Even if the manager’s

expectation were correct, the future price will change as a result of the repurchase itself.

We denote this actual price with P2. If the real policy of the firm is independent of

16

repurchases and issuances,14 then the non-arbitrage relation between prices implies

(1− α)P2 = P ′2 − αP1. (11)

Empirically, we observe the actual price, but not what the price would be had the manager

not repurchased any shares. Therefore, we infer P ′2 using expression (11) and obtain the

additional return from repurchase as

Repurchase timing =P2 − P ′2P1

= α

(P2 − P1P1

). (12)

A similar argument can be made for the calculation of market timing with SEOs or equity

sales.

Finally, note that stock returns in the market timing measures need to be adjusted for

risk. One way to see how the risk adjustment works is to consider, for example, the stock

repurchase by the company as an investment into company’s own shares. The return on

the investment, adjusted for risk, is then shared among all firm’s investors. To make the

adjustment, we use the Fama and French 100 portfolios formed on size and book-to-market

deciles. Each month, we match firms in our sample to the comparable size and book-to-

market portfolios based on the break points available on Kenneth French’s web site and

calculate the difference in buy-and-hold returns for our firms and these portfolios.15

14This assumption implies, in particular, that the investment policy of the firm is independent of itsfinancing decisions. Consistent with this assumption, Brav et al. (2005) find in their interviews withfirms’CFOs that payout decisions are considered of second-order importance relative to the operatingdecisions of the firm.15This method is preferred over risk adjustment using the market model since using cumulative abnor-

mal returns over a long period may yield positively biased test statistics (Barber and Lyon (1997)).

17

3.3 Summary Statistics on Equity Market Timing Measures

Panel A of Table 1 presents the average additional returns earned by long-term share-

holders when the company sells or repurchases a fraction of its stock. Positive entries in

the table correspond to successful market timing efforts. It appears from the table that

firms time the market with both stock repurchases and equity sales. For example, the

mean return from SEO timing with a one-year horizon is positive 0.45% (t-stat = 2.28)

and the corresponding number for a three-year horizon is 3.23% (t-stat = 8.38). Since

SEOs represent only a small proportion of newly issued equity and most of the firm-year

observations do not have an SEO event, we also repeat the estimation using the measure

based on all equity sales (increases in the number of outstanding shares). This measure

produces similar results, with robust evidence of successful market timing of equity sales

with one- and three-year horizons. Specifically, the additional return earned by long-

term shareholders because of successful timing of equity sales is 0.49% per year and is

statistically different from zero (t-stat = 26.28).

Similarly, the evidence on share repurchases in Table 1 suggests that managers, on

average, time the market by buying back shares, although the magnitude of this effect

appears to be much smaller in economic terms. We find no evidence of successful timing

using the three-year horizon and the CRSP-based repurchase measure. Note, however,

that it is possible that some firms time the market and earn substantial returns, whereas

others engage in share repurchases for reasons that are unrelated to undervaluation.

Additionally, Table 1 offers summary statistics on the overall market timing ability of

firm managers and the imbalance in market timing strategies. For example, the sum of

timing with repurchases and SEOs captures the ability of the firm’s manager to time the

equity decision when the stock is either over- or underpriced. In contrast, the difference

between the two variables captures the imbalance in timing by a particular firm, with pos-

itive values indicating a propensity to time more successfully by buying back shares. We

18

observe that while over the one-year period there is no clear pattern, over the three-year

period firms appear to time equity issuance more successfully than they do repurchases.

We also display the average risk-adjusted returns after repurchases, SEOs, and equity

sales, along with fractions of repurchased or issued stock. For example, firms in our sample

buy back, on average, 3.15% of their outstanding shares and experience 1.37% in abnormal

returns the year after the repurchase.16 SEOs tend to be much larger in magnitude, with

firms issuing, on average, 20.17% of stock and earning -3.18% in abnormal returns the

following year.

Next, we investigate whether market timing characteristics of firms are persistent or

change quickly over time. For example, if a firm successfully times a stock repurchase, is

it also more likely to be a successful market timer in the future (e.g., because the manager

has a particular objective or the ability to correctly identify stock mispricing)? To answer

this question, we first split our total sample period into three-year periods, separated by a

one-year break between periods.17 For each three-year window, we sum the annual timing

measures. It is important to aggregate the timing measures over a period of time because

once a company issues or repurchases stock during a particular year, it is less likely to

do so again the next year. For example, frequent repurchases require large cash reserves

and SEOs trigger substantial underwriting costs. We then regress the timing measure

over a three-year window on the same measure in the previous period and report the

autocorrelation and the associated p-values in Table 2. The results suggest that indeed

firms that were successful timers in the past tend to remain successful in the future. This

is true for all market timing measures, with the exception of SEO timing, which is likely

driven by extremely low frequency of SEOs. For example, the autocorrelation between

16The abnormal returns after the repurchases are smaller in our sample than in previous studies (e.g.,Ikenberry, Lakonishok, and Vermaelen (1995)) because we look at actual repurchases rather than atannouncements of intent to buy back the stock.17A one-year break guarantees that we do not use the overlapping returns in our tests. Our results

become statistically and economically stronger if we use the back-to-back three-year periods.

19

the CRSP-based repurchase timing measures is 3.2% and is statistically different from

zero.

3.4 Firm Size and Equity Market Timing

Additional insights into how firms time sales and purchases of their equity can be obtained

by looking separately at the samples of small and large firms. It is conceivable that a

manager’s objective function depends on firm size. For example, it can be more important

to leave “a good taste in investors’mouths” if a firm is small and plans to grow in the

future by attracting new investors. Additionally, managers in small firms may believe that

their future compensation contracts will be shaped by future shareholders. Alternatively,

it is possible that small firms are more informationally opaque to investors and that

managers of such firms find it easier to time the market with both stock repurchases and

equity sales.

Table 3 indicates that smaller firms are more successful in timing equity issuance. In

particular, firms with market capitalization below $100 million earn an additional return

of 4.52% (t-stat = 5.00) because of SEO timing, as compared to −0.87% (t-stat = −3.38)

for firms with capitalization over $1 billion. The results are similar if we look at total

equity issuance, but are opposite for market timing with share repurchases. For example,

the returns due to repurchase timing for large and small firms are, respectively, 0.10%

and −0.09%, with the means being statistically different between the two groups.

In sum, we find that large firms are more successful repurchase timers and small firms

are more successful equity issuance timers. These results are in line with the findings of

Waruswitharana and Whited (2011), who document that large firms have more volatile

share repurchases and less volatile share issuances than small firms. Together with the

predictions of the theoretical model, our evidence suggests that managers of large firms are

more concerned with maximizing the welfare of existing shareholders, and that managers

20

of small firms look to create value for future shareholders.

Our measures of market timing are designed to capture whether firms repurchase

(issue) more shares when they expect high (low) stock returns, but do not indicate whether

timing is primarily due to post-event returns, program size, or the correlation structure.

For example, one might wonder whether our result that small firms time the market with

SEOs can be attributed to smaller firms having a larger volume of SEOs or a larger issue

size (e.g., because of greater financing needs). To explore these issues in more detail,

in Table 4 we present the separate components of our timing measures in subsamples of

data sorted by firm size. Large firms conduct smaller seasoned equity offerings, with the

average proportion of equity issued 12.6%, as compared to 36.1% for small firms. However,

the larger SEO timing for firms with small market capitalization is also strongly driven

by the return pattern. For example, small firms experience, on average, abnormal returns

of -19.9% in the year after the issue, whereas large firms post positive returns of 4.0%.

Our interpretation is that SEO timing is more pronounced for small firms because of

both return and issue size patterns (see Table 4). For repurchase timing, the main effects

appear to come from the stock return pattern since the average fraction of repurchases

shares is similar across subsamples.

3.5 CEO Compensation

We next analyze the relation between the success and nature of market timing strategies

and executive compensation. In their survey of firms’CFOs, Brav et al. (2005) found

that most firms keep track of whether their firm “beats the market”over the long term.

Additionally, the people who implement the repurchase policy admit to being rewarded

financially for successfully timing the market. This field evidence suggests that there may

be a link between market timing success and CEO pay.

Another view, however, is that CEOs are already aligned with the long-term share-

21

holders and personally benefit from market timing of any kind; hence they should not be

rewarded further. Alternatively, shareholders may desire to impose a particular timing

strategy on their CEOs. For example, if current shareholders have some influence on

the executive pay-setting process, we should expect CEOs to be rewarded for timing the

market with their share repurchase decisions, but not with SEOs.

Since we rely on Execucomp data, we can only analyze the relation between pay and

market timing for large firms and cannot verify whether results generalize to the whole

universe of firms. Our dependent variable in Table 5 is equal to the natural logarithm

of one plus total CEO compensation adjusted for inflation in the year following the mea-

surement of market timing. In all specifications, we control for past and contemporaneous

stock returns to ensure that higher compensation is not driven simply by higher returns.

We also include important firm characteristics, such as size, market-to-book ratio, lever-

age, R&D spending, and payout ratio, since they have been linked by prior research to

executive pay. Additionally, we include the year and firm fixed effects to absorb sources of

variation in market timing measures that may be undesirable because of their correlation

with the amount of asymmetric information. For example, if executives in firms with high

stock return volatility command a pay premium because these firms are diffi cult to man-

age, and executives in these firms always time the market more successfully, this effect

will be absorbed by the firm fixed effects.

Overall, we find that timing repurchases positively and significantly affects CEO com-

pensation. For example, a one standard deviation increase in timing of repurchases over

three-year horizon results in a 2.59% increase in CEO compensation or approximately

$119, 105 (t-stat = 3.03). In contrast, the effect of timing equity sales is significantly

negative. Interestingly, timing repurchases net of SEOs has the largest impact on com-

pensation (columns 9 and 10), implying that managers who engage in timing repurchases

and avoid timing new equity sales, earn the highest compensation.

22

In Table 6, we investigate whether all components of annual CEO compensation re-

spond to the successful market timing of share repurchases. For example, one might

expect a board of directors to be less likely to adjust the salary component of CEO com-

pensation since salaries tend to be sticky. Indeed, we find in Table 6 that the fact that

a CEO times the market primarily with repurchases rather than SEOs has no significant

effect on salary. In contrast, annual CEO bonuses strongly respond to successful market

timing of repurchases and negatively to timing of SEOs. For example, the coeffi cient on

timing repurchases minus timing SEOs is 0.89 (t-stat=4.20). Since bonuses represent the

most flexible part of CEO compensation, this result lends additional support to the hy-

pothesis that compensation responds to managerial timing actions. The effect of market

timing on the new equity-based grants (stock options and restricted stock) is generally in

the same direction as that on bonuses.

3.6 Alternative Explanations and Robustness

In this section, we analyze alternative explanations for our results, consider statistical

issues, and offer robustness checks. We first examine an alternative explanation that has

roots in the investment literature. Specifically, it is known that sales of equity often pre-

cede new capital investment and can be used to finance the exercise of real options (see,

e.g., DeAngelo, DeAngelo, and Stulz (2010)). In turn, the exercise of real options may de-

crease the systematic risk of the firm and result in lower expected returns. This could be

because options are exercised in anticipation of the low cost of capital (Cochrane (1991)).

Alternatively, as Carlson, Fisher, and Giammarino (2006, 2010) argue, the exercise trans-

forms riskier options into less risky assets in place and therefore reduces risk and expected

returns. Therefore, if we fail to adjust properly for the change in expected returns, we

may mistakenly attribute the evidence of post-issuance abnormal returns to mispricing.

This concern is further exacerbated by the fact that smaller firms are more likely to issue

23

equity to finance their investment. Thus we need to check whether the pattern that small

firms time the market more with SEOs can be attributed to investment.

Although the risk-adjustment technique that we employ does not match firms on

investment rates, we anticipate that the bias associated with risk adjustment due to

exercise of real options is likely small. First, the connection between investment and

returns may be pronounced for equity issuance, but it is more diffi cult to build a similar

risk-based explanation for stock repurchases. Second, as Lyandres, Sun, and Zhang (2008)

explain, new investment is often financed by such methods, as IPOs, SEOs, straight debt,

and convertible debt. Of those, only SEOs are present in our sample, and they are more

infrequent than other financing methods. For example, we find very similar (unreported)

results when we exclude SEOs from the equity sales data.

To see whether our results for equity sales and SEOs are driven by different real

investment dynamics in these firms, we sort all firms in our sample by their investment

rates, defined as capital expenditures in the year of the SEO divided by the beginning-of-

year book assets. For each investment tercile, we further sort the firms into three groups

by firm size. Table 7 shows our results. The pattern that timing with SEOs is much

more pronounced for small firms is evident across all groups of investment rates. We

also observe that the overall effectiveness of timing efforts does not vary consistently with

investment rates, suggesting that our results are unlikely to be driven by expected return

dynamics due to investment.

Another issue that we address is applicable to all ex-post measures of market timing

and was first raised by Mitchell and Stafford (2000). They argue that corporate events,

such as seasoned equity offerings and stock repurchases, are not independent and tend

to cluster over time and by industry. The authors further confirm in their tests that the

post-event returns are positively cross-correlated in the data and suggest a method to

correct the standard errors. After accounting for the positive cross-correlations of event-

24

firm abnormal returns, Mitchell and Stafford (2000) do not find any robust evidence of

abnormal performance for firms conducting SEOs and share repurchases.

A commonly used approach to address the statistical issue of positive cross-correlation

is by using the calendar-time portfolio analysis. However, it appears infeasible in our

setting since we are interested not in the abnormal post-event returns but in the timing

measures. Additionally, we would like to capture the cross-sectional differences in market

timing strategies and link them to executive compensation, while calendar-time portfolio

analysis can only give us the averages. Therefore, we follow the methodology by Mitchell

and Stafford (2000) in estimating the cross-correlations for different measures of market

timing and appropriately correcting the standard errors. As Kothari and Warner (2007)

point out, however, the inference with this method is not without caveats since precise

estimates of cross-correlations are diffi cult to come by.

Overall, we find that the cross-correlations tend to be lower for our market timing

measures than for post-event abnormal returns, suggesting that the bias in standard

errors should be less pronounced for our measures.18 We further calculate the t-statistics

for each measure of timing taking the cross-correlation into account and find that our

conclusions for timing with SEOs and equity sales remain unaffected by this alternative

procedure, but timing with repurchases becomes insignificant owing to relatively large

cross-correlation estimates. In Table 8 we report the corrected t-statistics for different

market timing measures in subsamples sorted by firm size. The means in each subsample

are the same as in Table 3. After correcting for cross-correlation, we observe significant

timing with SEOs and equity sales in medium, and particularly small firms, whereas there

is no timing in large firms.

We also check the robustness of our results to using earlier data. The starting date

18For example, Mitchell and Stafford (2000) find that the cross-correlation for returns after repurchasesis 0.017, while it is only 0.009 for our repurchase timing measure. Similarly, we find that the SEO timingmeasures are negatively cross-correlated in our sample.

25

for the main sample matches the availability of Execucomp data. However, meaningful

measures of repurchase timing can be constructed starting in 1982.19 Therefore, in Table

9 we present the summary statistics for this earlier period. Overall, we still observe that

firms do time equity issuance and SEOs successfully in this sample, whereas timing with

stock repurchases becomes more pronounced and is significant even using the three-year

horizon. Additionally, if we sort firms by market capitalization (unreported), we observe

the same pattern as in Table 3.

Another possible concern specific to repurchase timing measure is that not all of the

repurchases are done using open market programs. In particular, repurchases that are

executed via tender offers and Dutch auctions can involve a premium over the market

price, which is not accounted for in our measure. Thus it is possible that we will tend

to overestimate the returns created for the long-term shareholders by stock repurchase

timing. To address this issue, we rely on the observation by Comment and Jarrel (1991),

who show that tender offers and Dutch auctions typically have much larger program size

than open market stock repurchases. Therefore, in Table 9 we also give the results for

repurchases of less than 10% of firm’s outstanding stock and observe that the magnitude

and statistical significance of market timing remain similar.

4 Conclusion

In this paper, we infer managers’preferences for maximizing current or future shareholder

value by examining their firms’market timing strategies. Two modeling assumptions dis-

tinguish our approach from the extant literature. First, we look at managers who time the

market with both equity sales and share repurchases, so that we can meaningfully exploit

19After 1982, when the safe harbor provisions under the Securities and Exchange Act were adopted,firms could repurchase stock without facing the legal uncertainty (Jagannathan, Stephens, and Weisbach(2000)).

26

the imbalance in timing. Second, we allow the manager’s incentives to be imperfectly

aligned with those of an average firm shareholder. Our model predicts that the wealth of

current shareholders is maximized when a manager engages in market timing with share

repurchases. In contrast, managers who tend to time the market with equity issuances

maximize the value of future shareholders.

We test the model by introducing a new measure of market timing that quantifies the

additional returns due to equity market timing. Our evidence indicates that small firms

primarily time the market with SEOs and other equity sales, whereas large firms engage

in market timing with stock repurchases. Overall, these results suggest that the objective

functions of firm managers are likely different in small and large firms. We hope this

approach will find its way into future analyses concerned with managers’incentives.

Our results on CEO compensation suggest that executives in large firms tend to be

rewarded for market timing strategies that benefit existing shareholders. It would there-

fore be interesting to explore whether different managerial pay structures (e.g., different

compensation horizons) affect managerial incentives to time the market and whether there

are pronounced differences in compensation structures for executives of large and small

firms. We leave these questions to future research.

27

References

[1] Allen, F., and G. R. Faulhaber, 1989, Signaling by underpricing in the IPO market,

Journal of Financial Economics 23, 303-323.

[2] Babenko, I., 2009, Share repurchases and pay-performance sensitivity of employee

compensation contracts, Journal of Finance 64, 117-151.

[3] Babenko, I., Y. Tserlukevich, and A. Vedrashko, 2012, The credibility of share re-

purchase signaling, forthcoming in Journal of Financial and Quantitative Analysis.

[4] Baker, M., R. Ruback, and J. Wurgler, 2007, Behavioral corporate finance: A survey,

in Espen Eckbo, ed.: Handbook of Corporate Finance: Empirical Corporate Finance

(Elsevier, North Holland).

[5] Baker, M., and J. Wurgler, 2002, Market timing and capital structure, Journal of

Finance 57, 1-32.

[6] Banyi, M. L., E. A. Dyl, and K. M. Kahle, 2008, Errors in estimating share repur-

chases, Journal of Corporate Finance 4, 460-474.

[7] Barber, B. M., and J. D. Lyon, 1997, Detecting long-run abnormal stock returns: The

empirical power and specification of test statistics, Journal of Financial Economics

43, 341—372.

[8] Biais, B., P. Hillion, and C. Spatt, 1995, An empirical analysis of the limit order

book and the order flow in the Paris Bourse, Journal of Finance 50, 1655-1689.

[9] Bolton, P. , H. Chen, and N. Wang, 2012, Market timing, investment, and risk

management, Columbia Business School Working Paper.

28

[10] Brav, A., J. Graham, C. Harvey, and R. Michaely, 2005, Payout policy in the 21st

century, Journal of Financial Economics 77, 483-527.

[11] Brennan, M., and A. Thakor, 1990, Shareholder preferences and dividend policy,

Journal of Finance 45, 993-1018.

[12] Carlson, M., A. Fisher, and R. Giammarino, 2006, Corporate investment and as-

set price dynamics: Implications for SEO event studies and long-run performance,

Journal of Finance 61, 1009-1034.

[13] Carlson, M., A. Fisher, and R. Giammarino, 2010, SEO risk dynamics, Review of

Financial Studies 23, 4026-4077.

[14] Cochrane, J., 1991, Production-based asset pricing and the link between stock returns

and economic fluctuations, Journal of Finance 46, 209-237.

[15] Comment, R., and G. A. Jarrel, 1991, The relative signalling power of dutch-auction

and fixed-price self-tender offers and open-market share repurchases, Journal of Fi-

nance 46, 1243-1271

[16] Constantinides, G., and B. Grundy, 1989, Optimal investment with stock repurchase

and financing as signals, Review of Financial Studies 2, 445-465.

[17] Corwin, S., 2003, The determinants of underpricing for seasoned equity offers, Journal

of Finance 58, 2249-2279.

[18] DeAngelo, H., L. DeAngelo, and R. Stulz, 2010, Seasoned equity offerings, market

timing, and the corporate lifecycle, Journal of Financial Economics 95, 275-295.

[19] Dittmar, A., and R. Dittmar, 2008, The timing of financing decisions: An exam-

ination of the correlation in financing waves, Journal of Financial Economics 90,

59-83.

29

[20] Fama, E., and K. French, 2005, Financing decisions: Who issues stock? Journal of

Financial Economics 76, 549—582.

[21] Graham, J. R., and C. R. Harvey, 2001, The theory and practice of corporate finance:

Evidence from the field, Journal of Financial Economics 60, 187—243.

[22] Greenwood, R., 2005, Short- and long-term demand curves for stocks: Theory and

evidence on the dynamics of arbitrage, Journal of Financial Economics 75, 607—649.

[23] Grossman, S. J., 1976, On the effi ciency of competitive stock markets where traders

have diverse information, Journal of Finance 31, 573—585.

[24] Grullon, G., and R. Michaely, 2002, Dividends, share repurchases, and the substitu-

tion hypothesis, Journal of Finance 57, 1649-1684.

[25] Hennessy, C., D. Livdan, and B. Miranda, 2010, Repeated signalling and firm dy-

namics, Review of Financial Studies 23, 1981—2023.

[26] Hertzel, M., M. Huson, and R. Parrino, 2012, Staging in public equity markets,

Journal of Financial Economics, forthcoming.

[27] Huang, S., and A. V. Thakor, 2011, Investor heterogeneity, investor-management dis-

agreement, and open-market share repurchases, Washington University in St. Louis

working paper.

[28] Ikenberry, D., J. Lakonishok, and T. Vermaelen, 1995, Market underreaction to open

market share repurchases, Journal of Financial Economics 39, 181-208.

[29] Ikenberry, D., J. Lakonishok, and T. Vermaelen, 2000, Stock repurchases in Canada:

Performance and strategic trading, Journal of Finance 55, 2373-2397.

30

[30] Jagannathan, M., C. P. Stephens, and M. Weisbach, 2000, Financial flexibility and

the choice between dividends and stock repurchases, Journal of Financial Economics

57, 355-384.

[31] Jenter, D., 2005, Market timing and managerial portfolio decisions, Journal of Fi-

nance 60, 1903—1949.

[32] Jenter, D., K. Lewellen, and J. B. Warner, 2011, Security issue timing: What do

managers know, and when do they know it? Journal of Finance 66, 413-443.

[33] Kahle, K., 2002, When a buyback isn’t a buyback: Open market repurchases and

employee options, Journal of Financial Economics 63, 235-261.

[34] Khan, M., L. Kogan, and G. Serafeim, 2012, Mutual fund trading pressure: Firm-

level stock price impact and timing of SEOs, Journal of Finance 67, 1371-1396.

[35] Kothari, S. P., and J. B. Warner, 2007, Econometrics of event studies, in Espen

Eckbo, ed.: Handbook of Corporate Finance: Empirical Corporate Finance (Elsevier,

North Holland).

[36] Leland, H., and D. Pyle, 1977, Information asymmetries, financial structure, and the

intermediation, Journal of Finance 32, 371-387.

[37] Li, E. X. N., D. Livdan, and L. Zhang, 2009, Anomalies, Review of Financial Studies

22, 4301-4334.

[38] Loughran, T., and J. Ritter, 1995, The new issues puzzle, Journal of Finance 50,

23-51.

[39] Loughran, T., and J. Ritter, 1997, The operating performance of firms conducting

seasoned equity offerings, Journal of Finance 52, 1823-1850.

31

[40] Loughran, T., and A. Vijh, 1997, Do long-term shareholders benefit from corporate

acquisitions? Journal of Finance 52, 1765—1790.

[41] Lyandres, E., L. Sun, and L. Zhang, 2008, The new issues puzzle: Testing the

investment-based explanation, Review of Financial Studies 21, 2825-2855.

[42] Mikkelson, W., and M. Partch, 1986, Valuation effects of security offerings and the

issuance process, Journal of Financial Economics 15, 31-60.

[43] Miller, M., and K. Rock, 1985, Dividend policy under asymmetric information, Jour-

nal of Finance 40, 1031-1051.

[44] Morellec, E., and N. Schürhoff, 2011, Corporate investment and financing under

asymmetric information, Journal of Financial Economics 99, 262-288.

[45] Myers, S. C., and N. S. Majluf, 1984, Corporate financing and investment decisions

when firms have information that investors do not have, Journal of Financial Eco-

nomics 13, 187-221.

[46] Ofer, A., and A. Thakor, 1987, A theory of stock price responses to alternative

corporate cash disbursement methods: Stock repurchases and dividends, Journal of

Finance 42, 365-394.

[47] Pontiff, J., and A. Woodgate, 2008, Share issuance and cross-sectional returns, Jour-

nal of Finance 63, 921-945.

[48] Shleifer, A., 1986, Do demand curves for stocks slope down? Journal of Finance 41,

579-590.

[49] Shleifer, A., and R. W. Vishny, 1997, The limits of arbitrage, Journal of Finance 52,

35-55.

32

[50] Shleifer, A., and R. W. Vishny, 2003, Stock market driven acquisitions, Journal of

Financial Economics 70, 295-311.

[51] Skinner, D. J., 2008, The evolving relation between earnings, dividends, and stock

repurchases, Journal of Financial Economics 87, 582-609.

[52] Stephens, C., and M. Weisbach, 1998, Actual share reacquisitions in open-market

share repurchase programs, Journal of Finance 53, 313-333.

[53] Vermaelen, T., 1981, Common stock repurchases and market signaling, Journal of

Financial Economics 9, 139-183.

[54] Waruswitharana, M., and T. Whited, 2011, Equity market misvaluation and firm

financial policies, University of Rochester working paper.

[55] Wurgler, J., and E. Zhuravskaya, 2002, Does arbitrage flatten demand curves for

stocks? Journal of Business 75, 583-608.

[56] Yang, B., 2011, A dynamic model of corporate financing with market timing, Georgia

State University working paper.

33

Appendix

Proof of Proposition 1.Applying the projection theorem for a normal distribution, we obtain the conditional

mean and variance of the long-term price given a managerial signal

E(P2|v) =σ2ε

σ2p + σ2εP0 +

σ2pσ2p + σ2ε

v, (13)

V ar(P2|v) =σ2pσ

2ε

σ2p + σ2ε. (14)

Substituting conjecture for the market-clearing price P1 from (4) into the manager’s prob-lem (3), and taking the first-order condition with respect to F , we obtain

F ∗ =E(P2|v)− P0

2β=

σ2pσ2p + σ2ε

v − P02β

. (15)

The second-order condition is satisfied whenever λ (proportion of firms that repurchaseor sell stock for information reasons) is less than 1

2. Whenever λ > 1/2, the equilibrium

does not exist. The conditional mean of the long-term price is

E(P2|F ) = λE(P2|F, informed) + (1− λ)E(P2|F, uninformed) (16)

= P0 + 2λβF.

The individual demand functions by short-term and incoming shareholders are given,respectively, by

X∗s = Qs +E (P2|F )− P1

θs= Qs −

(1− 2λ) βF

θs, (17)

X∗i = Qi +E (P2|F )− P1

θi= Qi −

(1− 2λ) βF

θi. (18)

The equilibrium price is defined by the market clearing condition, which is

X∗s +X∗i + F = 0. (19)

Since in absence of arbitrage P0 = E (P1), we also must haveQs = −Qi, i.e., in absenceof information the net demand for stock is zero. Substituting the demand functions into(19) and also using conjecture for the equilibrium price (4), we obtain the equilibriumprice as given in the main text. QED.

34

Proof of Proposition 2.We can write the change in expected wealth of short-term shareholders as a result of

market timing by the firm as

E (∆Ws) = E[Xs

(P2 − P1

)−Qs

(P2 − P0

)]. (20)

Note the second term in the expression above has a zero mean. Substituting the optimaldemand functions from (17) and (18) into (20), we have

E (∆Ws) = E

Qs +E(P2|F

)− P1

θs

(P2 − P1) . (21)

Using the conditional expectation of the long-term price (16) and the equilibrium price(7), we can further simplify this expression to

E (∆Ws) = E

[(Qs −

(1− 2λ) βF

θs

)(P2 − P1

)]. (22)

Using the expression for the optimal demand for stock by the firm (15) and the marketclearing price, we obtain

E (∆Ws) = −(1− 2λ) β

θsE[F(P2 − P0 − βF

)](23)

= −(1− 2λ) β

θs

(E[F · P2

]+ βE

[F 2]).

Finally, after simplifying the expression and using

E(F 2)

= V ar

(σ2p

σ2p + σ2ε

v − P02β

)=

σ4pσ2p + σ2ε

1

4β2, (24)

and E(F · P2

)= Cov

(σ2p

σ2p + σ2ε

v

2β, P2

)=

σ4p(σ2p + σ2ε

)2β, (25)

we obtain the change in expected wealth of shareholders

E (∆Ws) = −(1− 2λ)

4θs

σ4pσ2p + σ2ε

< 0. (26)

Thus, short-term shareholders are unambiguously worse off as a result of market timing.Note also that if we considered the change in utility of short-term shareholders from (5),this result would only be reinforced. This is because in the absence of market timing, theoptimal demand for stock is Xs = Qs and hence adjustment costs are zero. The proof forincoming shareholders is identical if index s is changed everywhere to i. QED.

35

Proof of Proposition 3.We start by showing that incoming shareholders are negatively affected by the market

timing of repurchases. The difference in their profits due to the timing of repurchases is

E(∆Wi|Rep) = E[X∗i (P2 − P1)︸ ︷︷ ︸gain/loss with rep. timing

− Xnorepi (P2 − P norep1 )︸ ︷︷ ︸

gain/loss without rep. timing

|Rep], (27)

where the expectation is taken with respect to uncertainty in the managerial signal, ε.Note that when there is no timing by the manager, the demand for stock by incomingshareholders is Xnorep

i = Qi, and the price at date 1 is equal to the unconditional mean,P norep1 = P0. Using these facts and rewriting the expression above gives

E(∆Wi|Rep) = (X∗i −Qi)E [P2 − P1|Rep]︸ ︷︷ ︸quantity effect

+Qi (P0 − P1)︸ ︷︷ ︸price effect

. (28)

The first part in (28) captures how shareholders are affected because of the change in theirdemand for stock as result of market timing, whereas the second part shows the effect ofprices.Let us first analyze the quantity effect. Using the optimal demand function from (18)

and the conditional expectation of long-term price from (16), we obtain

X∗i −Qi =E (P2|F )− P1

θi=

(2λ− 1) βF

θi. (29)

It is easy to see that the last expression is negative since F > 0 for repurchases, λ < 1/2,and β > 0. Additionally,

E[P2 − P1|Rep] = E[P2 − (P0 + βF ∗)|F ∗ > 0]. (30)

Using the expression for the optimal demand for stock by the firm from (15), we obtain

E[P2 − P1|Rep] = E[P2 − P0 −σ2p (v − P0)2(σ2p + σ2ε

) |v > P0] (31)

=σ2p + 2σ2ε

2(σ2p + σ2ε)E [v − P0|v > P0] > 0.

Thus we can see that incoming shareholders are negatively affected by market timingthrough the quantity effect

(X∗i −Qi)E [P2 − P1|Rep] < 0. (32)

Also note that whenever there is repurchase timing by the firm, F > 0, the price atdate 1 always exceeds the unconditional mean, P1 > P0. Additionally, for the incoming

36

shareholders Qi > 0, implying that the price effect is negative. Thus, we have

E(∆Wi|Rep) < 0.

As before, if we consider the change in utility of incoming shareholders instead ofchange in wealth, the conclusions would remain the same. This is because in absenceof repurchases and SEOs, the optimal demand for stock by incoming shareholders isXi = Qi, and thus they do not incur any adjustment costs. The proof for the short-termshareholders in the case of market timing of equity sales follows essentially the same steps.QED.

37

Table1.SummaryStatistics.

Thenumbersinthetablearetheadditionalreturns(in%)earnedbytheshareholdersduetomarkettimingeffortsbythe

firm.TimingSEOsisequaltothepost-SEOrisk-adjustedreturnin%,calculatedoverahorizonofoneorthreeyearsand

multipliedbytheproportionofnewlyissuedequity(asidentifiedintheSDCNew

Issuesdatabase).Timingsalesisequaltothe

risk-adjustedreturnin%,calculatedoverahorizonofoneorthreeyearsafteranincreaseinsharesoutstanding(asidentifiedin

theCRSP

monthlydatabase),andmultipliedbythefractionofequityissued.Timingrepurchasesisequaltothepost-repurchase

risk-adjustedreturnin%,calculatedoverahorizonofoneorthreeyearsafteradecreaseinsharesoutstanding(asidentifiedin

theCRSP

monthlydatabase),andmultipliedbythefractionofequityrepurchased.TimingrepurchasesCompustatisequaltothe

post-repurchaserisk-adjustedstockreturnin%,calculatedoverahorizonofoneorthreeyearsandmultipliedbythefractionof

equityrepurchased(asidentifiedfrom

theCompustatquarterlydatabase).Thelastcolumninthetablegivest-teststatisticsfor

thedifferenceofthemeanfrom

zero.

Variable

Obs.

Mean

St.dev.

10th

Median

90th

T-test

TimingSEOs(1-year)

3,615

0.452

11.935

-8.707

0.744

11.078

2.28∗∗

TimingSEOs(3-year)

2,577

3.229

19.572

-13.343

3.021

24.031

8.38∗∗∗

Timingsales(1-year)

68,553

0.491

4.892

-1.904

0.034

3.859

26.28∗∗∗

Timingsales(3-year)

49,793

1.312

9.004

-3.074

0.121

8.185

32.52∗∗∗

Timingrepurchases(1-year)

36,092

0.028

1.863

-1.355

-0.005

1.266

2.81∗∗∗

Timingrepurchases(3-year)

28,674

-0.050

2.994

-2.272

-0.018

1.784

-2.82∗∗∗

TimingrepurchasesCompustat(1-year)

28,612

0.045

1.761

-1.380

-0.007

1.345

4.30∗∗∗

TimingrepurchasesCompustat(3-year)

21,102

0.051

3.871

-2.964

-0.046

2.639

1.92∗

TimingSEOsandrepurchases(1-year)

38,717

0.068

4.037

-1.681

-0.004

2.019

3.31∗∗∗

TimingSEOsandrepurchases(3-year)

30,561

0.226

6.410

-2.635

-0.013

3.175

6.15∗∗∗

TimingrepurchasesminusSEOs(1-year)

38,717

-0.017

4.099

-2.026

-0.007

1.659

-0.73

TimingrepurchasesminusSEOs(3-year)

30,561

-0.319

6.475

-3.530

-0.026

2.234

-8.61∗∗∗

38

Variable

Obs.

Mean

St.dev.

10th

Median

90th

T-test

FractionofissuedequityinSEO

3,615

20.174

17.826

5.020

15.561

40.228

N/A

Fractionofissuedequity

68,553

7.216

12.513

0.141

1.688

23.194

N/A

Fractionofrepurchasedequity

36,092

3.154

4.240

0.041

1.439

8.885

N/A

Fractionofrepurchasedequity(quarterlydata)

28,612

3.219

3.965

0.074

1.727

8.639

N/A

Risk-adjustedreturnsafterrepurchase(1year)

36,092

1.374

47.047

-48.469

-3.698

51.013

5.55∗∗∗

Risk-adjustedreturnsafterrepurchase(3year)

28,674

-0.784

72.087

-74.728

-9.925

75.860

-1.84∗

Risk-adjustedreturnsafterSEO(1year)

3,615

-3.138

47.487

-55.315

-7.968

48.325

-3.97∗∗∗

Risk-adjustedreturnsafterSEO(3year)

2,577

-15.046

87.483

-104.66

-28.339

80.979

-8.73∗∗∗

Risk-adjustedreturnsafterequityissuance(1year)68,553

-1.290

48.184

-52.930

-6.289

51.221

-7.01∗∗∗

Risk-adjustedreturnsafterequityissuance(3year)49,793

-3.893

103.81

-105.33

-20.601

106.29

-8.37∗∗∗

39

Table 2. Serial Autocorrelation of Timing Measures.The numbers in the table are the serial autocorrelation coeffi cients for the different market

timing measures. We first split the total sample period into five three-year periods, separatedby a one-year break between periods. We then sum the different timing measures over eachthree-year window and regress the next three-year measure on the previous three-year measure.The variables are described in the header of Table 1. P-values for the difference of the autocor-relation from zero are displayed in parentheses.

Variable Autocorrelation Variable AutocorrelationTiming SEOs (1-year) -0.011

(0.149)Timing repurchases (1-year) 0.032∗∗∗

(0.001)Timing sales (1-year) 0.016∗∗

(0.048)Timing repurchases Compustat(1-year)

0.059∗∗∗

(0.001)

40

Table3.MarketTimingandFirmSize.

Thenumbersinthetablearetheadditionalreturns(in%)earnedbytheshareholdersduetomarkettimingeffortsbythefirm.

ThevariablesaredescribedintheheaderofTable1.Columns2and3presentstatisticsforfirmswithmarketcapitalizationsof

lessthan$100million;columns4and5forfirmswithmarketcapitalizationabove$100millionbutbelow

$1billion;andcolumns

6and7forfirmsover$1billion.T-statisticsforthedifferenceofthemeanfrom

zeroareshowninparentheses.Thelastcolumn

providesatwo-samplet-testforthedifferenceinmeansbetweensmallandlargefirms.

Obs.

size<$100m

Obs.

$100m<size<$1B

Obs.

size>$1B

T-testfor

difference

TimingSEOs(1-year)

383

4.515∗∗∗

(5.00)

2,069

0.432

(1.63)

1,160

-0.865∗∗∗

(-3.38)

5.73∗∗∗

TimingSEOs(3-year)

235

10.618∗∗∗

(5.61)

1,509

3.138∗∗∗

(5.76)

831

1.288∗∗∗

(3.43)

4.83∗∗∗

Timingsales(1-year)

22,527

1.020∗∗∗

(26.88)

28,209

0.359∗∗∗

(12.56)

17,592

0.015

(0.53)

21.50∗∗∗

Timingsales(3-year)

15,013

1.908∗∗∗

(22.68)

21,026

1.354∗∗∗

(21.38)

13,669

0.563∗∗∗

(9.66)

13.14∗∗∗

Timingrepurchases(1-year)

11,299

-0.089∗∗∗

(-4.22)

13,703

0.066∗∗∗

(4.19)

11,019

0.100∗∗∗

(7.51)

-7.59∗∗∗

Timingrepurchases(3-year)

8,683

-0.030

(-0.73)

11,004

-0.102∗∗∗

(-3.75)

8,949

-0.005

(-0.22)

-0.55

TimingrepurchasesCompustat(1-year)

7,516

-0.056∗∗

(-2.33)

10,751

0.042∗∗

(2.51)

10,287

0.122∗∗∗

(8.50)

-6.34∗∗∗

TimingrepurchasesCompustat(3-year)

5,174

-0.021

(-0.31)

7,827

-0.001

(-0.01)

8,080

0.149∗∗∗

(4.31)

-2.20∗∗

41

Table4.Post-eventStockReturnsandProgram

SizeinSubsamplesSortedby

FirmSize.

Thetablegivestheaverageone-yearrisk-adjustedreturnsaftertheevent(SEO,equitysale,orrepurchase)andtheaverage

programsizeineachsubsample.Columns2and3presentstatisticsforfirmswithmarketcapitalizationsoflessthan$100million;

columns4and5forfirmswithmarketcapitalizationabove$100millionbutbelow

$1billion;andcolumns6and7forfirmsover

$1billion.T-statisticsforthedifferenceofthemeanfrom

zeroareshowninparentheses.

Obs.

size<$100m

Obs.

$100m<size<$1B

Obs.

size>$1B

FractionofequityissuedinSEO

383

36.06%

2,069

21.51%

1,160

12.55%

Risk-adjustedreturnsafterSEO(1-year)

383

-19.92∗∗∗

(-7.45)

2,069

-3.98∗∗∗

(-3.80)

1,160

3.99

(3.09)

Fractionofequityissued

22,527

7.87%

28,209

7.53%

17,592

5.84%

Risk-adjustedreturnsafterequityissuance(1-year)

22,527

-7.33∗∗∗

(-19.25)

28,209

0.89∗∗∗

(3.22)

17,592

3.00∗∗∗

(11.25)

Fractionofequityrepurchased

11,299

3.54%

13,703

3.07%

11,019

2.85%

Risk-adjustedreturnsafterrepurchase(1-year)

11,299

-3.47∗∗∗

(-6.53)

13,703

3.13∗∗∗

(7.78)

11,019

4.16∗∗∗

(12.84)

FractionofequityrepurchasedCompustat

7,516

3.28%

10,751

3.08%

10,287

3.31%

Risk-adjustedreturnsafterrepurchaseCompustat

(1-year)

7,516

-3.05∗∗∗

(-4.53)

10,751

1.99∗∗∗

(4.47)

10,287

3.03∗∗∗

(9.34)

42

Table 5. Total CEO Compensation and Equity Market Timing.The dependent variable is the logarithm of one plus the total annual CEO compensation

adjusted for inflation. Firm size is the logarithm of the book assets; book leverage is the sumof long-term and short-term liabilities divided by the book value of assets; contemporaneous(past) stock returns are the returns during (one year prior to) the year in which compensationis measured; and payout ratio is the sum of share repurchases and dividends paid on commonstock during the year, normalized by the book assets. Other variables are described in theheader of Table 1. The estimation includes year and firm-fixed effects and the standard errorsare clustered at the firm level.

Variable (1) (2) (3) (4) (5) (6)Timing repurchases (1-year) 1.492∗∗∗

(3.03)Timing repurchases (3-year) 1.747∗∗∗

(4.87)Timing SEOs (1-year) -0.771∗∗

(-2.26)Timing SEOs (3-year) -0.334∗∗

(-2.28)Timing sales (1-year) -0.669∗∗∗

(-3.53)Timing sales (3-year) -

0.870∗∗∗

(-7.83)R&D/assets 0.072

(0.43)0.070(0.42)

0.070(0.42)

0.068(0.41)

0.058(0.34)

0.053(0.32)

Firm size 0.228∗∗∗

(10.07)0.228∗∗∗

(10.08)0.228∗∗∗

(10.08)0.229∗∗∗

(10.14)0.233∗∗∗

(10.35)0.229∗∗∗

(10.34)Book leverage -0.139

(-1.14)-0.136(-1.14)

-0.138(-1.14)

-0.138(-1.14)

-0.138(-1.14)

-0.126(-1.12)

Tobin’s Q/1000 0.180∗∗

(2.07)0.176∗∗

(2.05)0.180∗∗

(2.06)0.179∗∗

(2.06)0.184∗∗

(2.05)0.173∗∗

(2.02)Past stock return 0.192∗∗∗

(14.73)0.187∗∗∗

(14.33)0.197∗∗∗

(15.32)0.198∗∗∗

(15.44)0.189∗∗∗

(14.68)0.179∗∗∗

(14.50)Contemporaneous stockreturn

0.171∗∗∗

(12.44)0.172∗∗∗

(12.66)0.176∗∗∗

(13.03)0.178∗∗∗

(13.10)0.166∗∗∗

(12.42)0.170∗∗∗

(12.75)

Payout ratio 9.705∗∗∗

(3.73)9.772∗∗∗

(3.76)9.637∗∗∗

(3.71)9.625∗∗∗

(3.70)9.789∗∗∗

(3.76)9.433∗∗∗

(3.62)Adjusted-R2 0.715 0.716 0.715 0.715 0.716 0.717Observations 27,402 27,402 27,402 27,402 27,402 27,402

43

Variable (7) (8) (9) (10)Timing SEOs and repurchases (1-year) -0.213

(-0.76)Timing SEOs and repurchases (3-year) 0.039

(0.28)Timing repurchases minus SEOs (1-year) 0.961∗∗∗

(3.34)Timing repurchases minus SEOs (3-year) 0.587∗∗∗

(4.15)R&D/assets 0.068

(0.41)0.068(0.41)

0.072(0.44)

0.068(0.41)

Firm size 0.229∗∗∗

(10.12)0.229∗∗∗

(10.11)0.228∗∗∗

(10.14)0.228∗∗∗

(10.16)Book leverage -0.139

(-1.14)-0.139(-1.14)

-0.138(-1.14)

-0.136(-1.14)

Tobin’s Q 0.180∗∗

(2.06)0.180∗∗

(2.06)0.180∗∗

(2.07)0.177∗∗

(2.06)Past stock return 0.200∗∗∗

(15.57)0.199∗∗∗

(15.57)0.191∗∗∗

(14.73)0.193∗∗∗

(14.95)Contemporaneous stock return 0.179∗∗∗

(13.17)0.179∗∗∗

(13.16)0.170∗∗∗

(12.55)0.175∗∗∗

(12.88)Payout ratio 9.645∗∗∗

(3.71)9.663∗∗∗

(3.72)9.662∗∗∗

(3.72)9.640∗∗∗

(3.71)Adjusted-R2 0.715 0.715 0.716 0.716Observations 27,402 27,402 27,402 27,402

44

Table 6. Components of CEO Compensation and Equity Market Timing.The dependent variable in columns 1 and 2 is the logarithm of one plus the CEO salary

adjusted for inflation. The dependent variable in columns 3 and 4 is the logarithm of one plusthe CEO bonuses received during the year adjusted. The dependent variable in columns 5 and6 is the logarithm of one plus the Black-Scholes value of stock option grants and the value ofrestricted stock grants, adjusted for inflation. Firm size is the logarithm of the book assets; bookleverage is the sum of long-term and short-term liabilities divided by the book value of assets;contemporaneous (past) stock returns are the returns during (one year prior to) the year in whichcompensation is measured; and payout ratio is the sum of share repurchases and dividends paidon common stock during the year, normalized by the book assets. Other variables are describedin the header of Table 1. The estimation includes year and firm-fixed effects and the standarderrors are clustered at the firm level.

(1) (2) (3) (4) (5) (6)Variable Salary Salary Bonus Bonus Equity

GrantsOptionGrants

Timing repurchases minusSEOs (1-year)

0.035(0.77)

0.892∗∗∗

(4.20)0.808∗

(1.87)

Timing repurchases minusSEOs (3-year)

0.041(1.53)

0.464∗∗∗

(3.16)0.543∗∗

(2.53)

R&D/assets 0.095∗∗∗

(3.21)0.095∗∗∗

(3.20)-0.129(-1.27)

-0.133(-1.30)

0.103(0.45)

0.100(0.43)

Firm size 0.082∗∗∗

(10.52)0.082∗∗∗

(10.52)0.089∗∗∗

(3.66)0.089∗∗∗

(3.67)0.266∗∗∗

(7.98)0.266∗∗∗

(7.98)Book leverage -0.011

(-1.04)-0.011(-1.03)

-0.082(-1.25)

-0.081(-1.24)

-0.187(-1.15)

-0.186(-1.15)

Tobin’s Q/1000 0.042∗

(1.83)0.042∗

(1.81)0.261∗∗

(2.30)0.258∗∗

(2.25)-0.105(-0.54)

-0.108(-0.56)

Past stock return 0.021∗∗∗

(6.99)0.021∗∗∗

(7.02)0.180∗∗∗

(15.72)0.183∗∗∗

(16.13)0.193∗∗∗

(10.17)0.194∗∗∗

(10.23)Contemporaneous stockreturn

0.011∗∗∗

(3.60)0.011∗∗∗

(3.66)0.279∗∗∗

(19.75)0.283∗∗∗

(20.14)0.127∗∗∗

(6.38)0.130∗∗∗

(6.62)

Payout ratio 2.690∗∗∗

(3.34)2.687∗∗∗

(3.34)1.682(0.59)

1.621(0.57)

18.03∗∗∗

(3.80)18.01∗∗∗

(3.80)Adjusted-R2 0.878 0.878 0.613 0.613 0.549 0.549Observations 27,628 27,628 27,628 27,628 27,432 27,432

45

Table 7. Returns Due to Market Timing and Investment Rates.The numbers in the table are the additional returns (in %) earned by the shareholders due

to market timing efforts by the firm. The low (high) investment rate group includes firms thathave investment (capital expenditures divided by the book assets) during the issuance year inthe lowest (highest) tercile. Other variables are described in the header of Table 1. T-statisticsfor the difference of mean from zero are shown in parentheses. The last column provides atwo-sample t-test for the difference in means between the group with high investment rate andthe low investment rate.

Low investment rateObs. size<$100m Obs. $100m<size<$1B Obs. size>$1B T-test

Timing SEOs(1-year)

128 6.237∗∗∗

(3.73)838 0.287

(0.65)493 -0.689∗∗

(-2.26)4.08∗∗∗

Timing SEOs(3-year)

59 9.227∗∗

(2.15)553 3.386∗∗∗

(3.78)341 0.668∗∗

(1.97)1.97∗∗

Timing sales(1-year)

7,581 1.143∗∗∗

(16.37)8,453 0.491∗∗∗

(8.85)4,768 0.048

(0.88)12.38∗∗∗

Timing sales(3-year)

4,895 2.177∗∗∗

(14.20)6,187 1.810∗∗∗

(14.89)3,738 0.510∗∗∗

(4.56)8.78∗∗∗

Medium investment rateTiming SEOs(1-year)

94 3.96∗∗

(2.23)531 0.301

(0.60)281 -1.120∗∗

(-1.99)2.75∗∗∗

Timing SEOs(3-year)

54 14.863∗∗∗

(4.25)402 1.584

(1.45)184 1.405∗

(1.64)3.74∗∗

Timing sales(1-year)

6,907 1.033∗∗∗

(15.36)8,955 0.354∗∗∗

(7.18)6,005 0.003

(0.07)12.76∗∗∗

Timing sales(3-year)

4,555 1.916∗∗∗

(12.85)6,613 1.307∗∗∗

(12.02)4,573 0.631∗∗∗

(6.39)7.19∗∗∗

High investment rateTiming SEOs(1-year)

117 5.661∗∗∗

(3.81)653 0.821∗

(1.79)367 -1.012∗∗

(-1.96)4.24∗∗∗

Timing SEOs(3-year)

80 11.253∗∗∗

(3.58)508 4.433∗∗∗

(4.71)289 1.600∗∗∗

(2.78)3.83∗∗

Timing sales(1-year)

5,822 1.217∗∗∗

(15.69)8,824 0.352∗∗∗

(6.79)6,220 0.009

(0.20)13.36∗∗∗

Timing sales(3-year)

3,731 2.093∗∗∗

(11.66)6,483 1.202∗∗∗

(10.14)4,773 0.595∗∗∗

(6.14)8.50∗∗∗

46

Table 8. Market Timing and Firm Size: Adjusting for Cross-Correlation.The numbers in the table are the additional returns (in %) earned by the shareholders due

to market timing efforts by the firm. The variables are described in the header of Table 1. Thestandard errors are calculated using the procedure in Mitchell and Stafford (2000), where wefirst estimate the cross-correlations between the timing measures in each subsample. T-statisticsfor the difference of mean from zero are based on standard errors adjusted for cross-correlationand shown in parentheses.

Obs. size<$100m Obs. $100m<size<$1B Obs. size>$1BTiming SEOs (1-year) 383 4.515∗∗∗

(3.02)2,069 0.432

(1.63)1,160 -0.865

(-0.83)Timing SEOs (3-year) 235 10.618∗∗∗

(5.61)1,509 3.138∗

(1.95)831 1.288

(0.94)Timing sales (1-year) 22,527 1.020∗∗∗

(3.57)28,209 0.359∗

(1.81)17,592 0.015

(0.08)Timing sales (3-year) 15,013 1.908∗∗∗

(5.38)21,026 1.354∗∗

(2.49)13,669 0.563

(0.85)Timing repurchases(1-year)

11,299 -0.089(-0.49)

13,703 0.066(0.45)

11,019 0.100(1.10)

Timing repurchases(3-year)

8,683 -0.030(-0.10)

11,004 -0.102(-0.48)

8,949 -0.005(-0.23)

47

Table9.Robustness:1982-2010SampleandExcludingTenderOffers.

Thenumbersinthetablearetheadditionalreturns(in%)earnedbytheshareholdersduetomarkettimingeffortsbythe

firm.TimingSEOsisequaltothepost-SEOrisk-adjustedreturnin%,calculatedoverahorizonofoneorthreeyearsand

multipliedbytheproportionofnewlyissuedequity(asidentifiedintheSDCNew

Issuesdatabase).Timingsalesisequaltothe

risk-adjustedreturnin%,calculatedoverahorizonofoneorthreeyearsafteranincreaseinsharesoutstanding(asidentifiedin

theCRSP

monthlydatabase),andmultipliedbythefractionofequityissued.Timingrepurchasesisequaltothepost-repurchase

risk-adjustedreturnin%,calculatedoverahorizonofoneorthreeyearsafteradecreaseinsharesoutstanding(asidentifiedin

theCRSP

monthlydatabase),andmultipliedbythefractionofequityrepurchased.Timingrepurchasesquarterlydataisequalto

thepost-repurchaserisk-adjustedstockreturnin%,calculatedoverahorizonofoneorthreeyearsandmultipliedbythefraction

ofequityrepurchased(asidentifiedfrom

theCompustatquarterlydatabase).Thelastcolumninthetablegivest-teststatisticsis

forthedifferenceofmeanfrom

zero.

1982-2010Sample

Variable

Obs.

Mean

St.dev.

10th

Median

90th

T-test

TimingSEOs(1-year)

5,518

0.381

11.274

-9.288

0.608

10.536

2.51∗∗

TimingSEOs(3-year)

4,156

2.464

18.781

-14.242

2.687

21.521

8.46∗∗∗

Timingsales(1-year)

98,628

0.392

4.776

-1.871

0.026

3.499

25.77∗∗∗

Timingsales(3-year)

76,567

0.978

8.783

-3.141

0.088

7.171

30.86∗∗∗

Timingrepurchases(1-year)

50,557

0.053

2.028

-1.348

-0.004

1.314

5.87∗∗∗

Timingrepurchases(3-year)

39,453

0.133

4.874

-3.068

-0.022

2.732

5.42∗∗∗

FirmsRepurchasinglessthan10%ofEquity:1992-2010

Timingrepurchases(1-year)

35,274

0.023

1.421

-1.144

-0.004

1.082

3.04∗∗∗

Timingrepurchases(3-year)

25,440

-0.009

3.262

-2.600

-0.026

2.162

-0.44

48