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Can Managers Forecast Aggregate Market Returns?

Authors

  • ALEXANDER W. BUTLER,

  • GUSTAVO GRULLON,

  • JAMES P. WESTON

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    • Butler is from the University of South Florida, and Grullon and Weston are from Rice University. We are grateful to Espen Eckbo, Jeff Fleming, Rick Green (the editor), George Kanatas, Lubos Pastor, Gordon Philips, David Robinson, Paul Schultz, and two anonymous referees for many helpful comments and suggestions. We thank seminar participants at Rice University, Texas A&M, the University of Minnesota, Washington University, St. Louis, and the University of South Florida for useful suggestions. We also thank Gretchen Fix, Ha Nguyen, Kalpana Sahajwani, and Monique Weston for excellent research assistance. Any remaining errors are our own.

ABSTRACT

Previous studies have found that the proportion of equity in total new debt and equity issues is negatively correlated with future equity market returns. Researchers have interpreted this finding as evidence that corporate managers are able to predict the systematic component of their stock returns and to issue equity when the market is overvalued. In this article we show that the predictive power of the share of equity in total new issues stems from pseudo-market timing and not from any abnormal ability of managers to time the equity markets.

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