SIFR Research Report Series, Institute for Financial Research
Pseudo Market Timing: Fact or Fiction?
() and Frank de Jong
Abstract: The average firm going public or issuing new equity has
underperformed the market in the long run. Endogeneity of the number of new
issues has been proposed as a potential explanation of this long-run
underperformance. Under pseudo market timing of new issues, ex post
measures of average abnormal returns may be negative on average despite
zero ex ante abnormal returns. We show that, under reasonable stationarity
assumptions on the process generating events, traditional measures of
average abnormal returns are consistent, and the pseudo market timing
effect is a small sample problem. In simulations of an empirical model we
demonstrate that the bias is small even in moderate sample sizes. An
abnormal return measure capturing a feasible investment strategy is not
biased. We argue that it is unlikely that pseudo market timing is the
explanation for the long-run underperformance in equity issuances.
Keywords: Abnormal return measures; Endogenous events; Event studies; Initial public offerings; Long-run underperformance; (follow links to similar papers)
JEL-Codes: C33; G14; G32; (follow links to similar papers)
38 pages, June 1, 2004
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