Agency Implications of Equity Market Timing

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Firms commonly transact in their own mispriced stock using private information. We challenge the view that this activity, known as equity market timing, benefits shareholders. By distinguishing the effect of a firm’s equity decisions from the effect of mispricing itself, we show that market timing can decrease expected shareholder wealth and welfare. Further, market timing has a more negative effect on existing shareholders when the share turnover is high. The effect of timing is asymmetric: shareholders prefer that the firm corrects underpricing rather than overpricing. Our theory can be used to infer firms’ maximization objectives from their observed market timing strategies.