Equity Issues and Returns: Managerial Timing, Reaction, or Both?

Abstract

We 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. Our empirical framework allows the timing and reaction stories compete for explanatory power in our tests. We 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. In industry level tests, we find that managers consistently react to industry level returns, and what little timing ability they may have is confined to the narrowest industry classifications.