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Market Timing and Managerial Portfolio Decisions



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    • *Dirk Jenter is at the MIT Sloan School of Management. I would like to thank Jeremy Stein, Peter Tufano, John Campbell, Jeffrey Wurgler, Robin Greenwood, Robert Kosowski, and Joshua White for their detailed suggestions. I am grateful for comments by the referee, Rick Green (the editor), Viral Acharya, Malcolm Baker, Nittai Bergman, Jeff Bevelander, David Brophy, Susan Chaplinsky, Randy Cohen, John Cochrane, Joshua Coval, John Graham, Paul Gompers, Brian Hall, Campbell Harvey, George Hettenhouse, David Hsieh, Li Jin, Joshua Lerner, S. P. Kothari, Asis Martinez-Jerez, Stewart Myers, Vikram Nanda, Scott Richardson, David Scharfstein, Antoinette Schoar, Andrei Shleifer, Luis Viceira, David Yermack, Jeffrey Zwiebel, and seminar participants at the 2002 Western Finance Association Meeting, the 2003 American Finance Association Meeting, the Harvard Finance Lunch, the University of Michigan, MIT Sloan, Indiana University, Emory, Harvard Business School, Stanford GSB, Darden, Duke, NYU Stern, Humboldt University Berlin, London Business School, William & Mary, and Chicago GSB. I would like to thank the Research Computing Services group at HBS, and especially Chris Allen and Kimball Lewis, for help with obtaining and understanding the data sets used in this paper. All remaining errors are my own.


This paper provides evidence that top managers have contrarian views on firm value. Managers' perceptions of fundamental value diverge systematically from market valuations, and perceived mispricing seems an important determinant of managers' decision making. Insider trading patterns shows that low valuation firms are regarded as undervalued by their own managers relative to high valuation firms. This finding is robust to controlling for noninformation motivated trading. Further evidence links managers' private portfolio decisions to changes in corporate capital structures, suggesting that managers try to actively time the market both in their private trades and in firm-level decisions.