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

Assumed managers act in best interest of their long-term shareholders and do have superior information, within this paper the potential value gain from the perspective of a diversified investor is quantified with a stochastic model. If firms have flexibility and are able to issue or buyback shares up to 25% of their market capitalization an annualized average value gain between 0.08% (fair low-opportunity market) and 14.41% (fair high-opportunity market) can be realized in case firms' management perfectly exploit the Market Timing opportunities. In case firms' management err in 5% of their equity transactions the corresponding annual gains amount to -0.13% and 5.41%. We conclude that managerial Market Timing provides significant potential for long-term shareholders with equity market characteristics, flexibility and firms' management skill being the key determinants. Long-term investors should grant limited flexibility to firm management and firm management should avoid too prompt exploitation of opportunities due to price pressure effects.