The share of equity issues in total new equity and debt issues is a strong predictor of U.S. stock market returns between 1928 and 1997. In particular, firms issue relatively more equity than debt just before periods of low market returns. The equity share in new issues has stable predictive power in both halves of the sample period and after controlling for other known predictors. We do not find support for efficient market explanations of the results. Instead, the fact that the equity share sometimes predicts significantly negative market returns suggests inefficiency and that firms time the market component of their returns when issuing securities.

Eric Sirri, Andrei Shleifer, and an anonymous referee for helpful comments. We acknowledge

Research in behavioral corporate finance takes two distinct approaches. The first emphasizes that investors are less than fully rational. It views managerial financing and investment decisions as rational responses to securities market mispricing. The second approach emphasizes that managers are less than fully rational. It studies the effect of nonstandard preferences and judgmental biases on managerial decisions. This survey reviews the theory, empirical challenges, and current evidence pertaining to each approach. Overall, the behavioral approaches help to explain a number of important financing and investment patterns. The survey closes with a list of open questions.

Feedback from Stock Prices to Cash Flows This paper explores how #nancial market prices directly inuence a #rm's cash ows. Feedback from #nancial market prices to cash ows arises when a #rm's non-#nancial stakeholders, e.g., its customers, employees, and suppliers, make decisions that are contingent on the information revealed by the price. When there are complementarities across these stakeholders, such feedback leads to cascades in which relatively small stock price moves trigger substantial changes in asset values. The paper analyzes the relation between such feedback eects and parameters such as the cost of information acquisition, the volume of liquidity trading, the volatility of the value of existing projects, the risk aversion of liquidity suppliers, and the precision of managerial information releases. Introduction Traditional valuation models take as given an investment's cash ow pattern, which, along with a discount rate, determines the price or value of the investment. B...

We compare the trading performance of independent directors and other officers of the firm. We find that independent directors earn positive and substantial abnormal returns when they purchase their company stock, and that the difference with the same firm’s officers is relatively small at most horizons. The results are robust to controlling for firm fixed effects and to using a variety of alternative specifications. Executive officers and independent directors make higher returns in firms with the weakest governance and the gap between these two groups widens in such firms. Independent directors who sit on the audit committee earn higher return than other independent directors at the same firm. Finally, independent directors earn significantly higher returns than the market when they sell the company stock in a window before bad news and around earnings restatements.

We extend the literature on secondary issues of common stock by examining long-run stock and operating performance. In contrast to the performance of primary equity issuers, the long-run stock performance of firms following secondary distributions is positive, but not significant. For a subsample of secondary issuers in which the seller is an insider, however, both three- and five-year post-issue abnormal stock returns are significantly negative. The operating performance of these firms also declines subsequent to the issue. This supports the hypothesis that the negative performance of secondary equity offerings can partly be attributed to managers exploiting “windows of opportunity ” by issuing overvalued shares.

at the University of Michigan, for valuable comments and/or discussions. Any remaining Information, Expected Utility, and Portfolio Choice We study the consumption-investment problem of an agent with a constant relative risk aversion preference function, who possesses noisy information about the future prospects of a stock. We also solve for the value of information to the agent in closed-form. We find that information can significantly alter consumption and asset allocation decisions. For reasonable parameter ranges, information increases consumption in the vicinity of 25%. Information can shift the portfolio weight on a stock from zero to around 70%. Thus, depending on the stock beta, the weight on the market portfolio can be considerably reduced with information, causing the appearance of under-diversification. The model indicates that stock holdings of informed agents are positively related to wealth, unrelated to systematic risk, and negatively related to idiosyncratic uncertainty. We also show that the dollar value of information to the agent depends linearly on his wealth and decreases with both the propensity to intermediate consumption and risk aversion. Information is an important feature of financial market settings. For example, investing

This paper examines the information content of insider trade Form 4 filings under the more timely disclosure regime introduced by Section 403 of the Sarbanes-Oxley Act of 2002 (SOX). Abnormal returns and trading volumes around filings of insider purchases are significantly greater after than before SOX. The increase in returns around post-SOX filings of insider purchases is comparable to the amount of news that used to leak prior to pre-SOX filings. In the case of insider sales, abnormal trading volumes around their filings are also greater post-SOX, but stock returns are not more negative. Further analysis identifies two factors contributing to the difference between pre- and post-SOX sale returns: a decrease in insiders ’ propensity to time their sales shortly ahead of bad news after SOX and the greater dispersion of filings over time compared to before SOX.

Studies of the long-run returns of equity issues find that the poor performance of new issues is common to non-issuers with similar characteristics. This paper examines the view that such evidence suggests that managers game long-run returns of the total market and their respective industry when timing new equity issues. This form of the timing hypothesis is modeled formally to motivate the empirical tests. Using aggregate new equity offering volume from 1970 to 1993, the empirical evidence in this paper supports some forms of successful gaming of market and industry valuation. In particular, the clustering of equity issue volume of smallcapitalization firms is found to be strongly correlated with subsequent returns of non-issuing, small-capitalization stocks. Industry results suggest that equity offerings appear to also coincide with peaks in the valuation of their respective industries. The economic gains to such timing behavior are highly significant.

backdating explain the stock price pattern around executive stock