Is Market Timing Good for Shareholders?

Abstract

Corporations often transact in their own mispriced stock. This activity, known as equity market timing, can generate substantial profits and increase the long-term stock price. We challenge a closely related popular view that market timing always benefits firm shareholders. Opportunistic financing maneuvers by a firm can negatively affect its uninformed stock owners because of adverse selection and the change in the firm’s short-term price, whereas the long-term returns do not accumulate to departing stockholders. The negative effect of market timing on stockholders increases with the share turnover. Furthermore, the effect of timing is asymmetric: shareholders prefer that the firm corrects underpricing rather than overpricing. Our theory can be used to better interpret the observed stock issuance and repurchase activities of firms. This paper was accepted by Gustavo Manso, finance.