Finding Market Timing Patterns When They are Unlikely to Exist

• In Event: Research with an Impact on Scholarship: Recognition, Valuation and Market Timing

Abstract

We show that periods during which firms issue equity and simultaneously retire debt reflect market timing patterns: such leverage decreasing recapitalizations (LDRs) occur after stock price run-ups and in periods of high valuation which subsequently decrease. The pattern even persists when the LDR is triggered by creditors exercising control rights, such as firms exhibit a high degree of financial reporting conservatism or those violating financial covenants. We also demonstrate that investment dynamics are unlikely to explain the observed valuation patterns. Taken together, we are not able to reject a market timing interpretation of the data.

Authors

• Michael Kisser, BI Norwegian Business School

• Loreta Rapushi, Norwegian School of Economics