HOW WELL DO MARKET TIMING, CATERING, AND CLASSICAL THEORIES EXPLAIN CORPORATE DECISIONS?

Authors


  • I gratefully acknowledge the advise, direction and encouragement given by Rajesh Aggarwal. I would like to thank the editor and an anonymous referee for helpful suggestions that considerably improved the paper. I am also grateful to John Spry, Kathy Combs, John Boyd, Abu Jalal, Jeff Oxman, and Tracy Wang for helpful comments. I alone am responsible for the errors.

Abstract

An important debate in corporate finance is whether chief executive officers (CEOs) exploit equity mispricing. In this article I construct a measure of the unexplained change in the CEO's stockholdings of the firm to empirically test the contrasting predictions of market timing, catering, and classical theories of corporate decisions. Consistent with the predictions of classical theories, I find that the firm increases its investments and even uses expensive capital to finance investments when there is an unexplained increase in the CEO's stockholdings. However, I find no empirical support for catering predictions and weak empirical support for market timing predictions.

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