Managerial market timing: What is the pot size for long-term shareholders assuming firm management acts in their best interest and does have an informational advantage?

Abstract

Using a stochastic model, this paper quantifies the potential value gain, for a diversified long-term shareholder, from market timing by trustworthy managers with superior information. If firms have flexibility and can issue or buy back shares up to 10% of their market capitalization, perfect market timing can yield an annualized average value gain between 0.07% (in a fair low-opportunity market) and 7.51% (in a fair high-opportunity market). With an error rate of 25%, the annual gains amount to −0.01% and 3.51%. Flexibility and management skill are key: long-term investors should grant limited flexibility to firm managers, and managers should avoid too prompt exploitation of opportunities due to price pressure effects.