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Capital Budgeting versus Market Timing: An Evaluation Using Demographics




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    • DellaVigna is from the Department of Economics, University of California, Berkeley. Pollet is from the Department of Finance, University of Illinois at Urbana-Champaign. We thank Malcolm Baker; Patrick Bolton; James Choi; Kenneth French; Ron Giammarino; Gur Huberman; Christopher Polk; Michael Weisbach; Jeffrey Wurgler; and audiences at Amsterdam University, Columbia University, Dartmouth College, Emory University, Harvard University, Rotterdam University, Tilburg University, UCLA, University of Illinois at Urbana-Champaign, the 2008 AFA Annual Meetings, and the 2008 Texas Finance Festival for comments. We also thank Jay Ritter for providing IPO data. Finally, we gratefully acknowledge the support of the NSF through grant SES-0418206.


Using demand shifts induced by demographics, we evaluate capital budgeting and market timing. Capital budgeting implies that industries anticipating positive demand shifts in the near future should issue more equity to finance greater capacity. To the extent that demand shifts in the distant future are not incorporated into equity prices, market timing implies that industries anticipating positive shifts in the distant future should issue less equity due to undervaluation. The evidence supports both theories: new listings and equity issuance respond positively to demand shifts during the next 5 years and negatively to demand shifts further in the future.