Equity Issues And Returns: Managerial Timing, Reaction, Or Both?

The authors run a horse race between two competing hypotheses about the relationship between market returns and managers' decisions to issue or retire equity: that managers are successfully forecasting (timing) subsequent market returns versus reacting to prior market returns. The authors' empirical framework allows the timing and reaction stories compete for explanatory power in their tests. They show that managers react to prior equity market returns in deciding when to transact equity, but they cannot successfully forecast subsequent equity market returns. Evidence from equity issues, filings, and repurchases all supports these conclusions.