Working Paper: NBER ID: w11882
Authors: Owen A. Lamont; Jeremy C. Stein
Abstract: We document that net equity issuance is considerably more sensitive to aggregate stock returns and Q's than to firm-level stock returns and Q's. Very similar patterns also emerge when we look at merger activity. In light of earlier work (Campbell 1991, Vuolteenaho 2002) which finds that aggregate stock returns are less informative about future cashflows than are firm-level stock returns--and thus, potentially more strongly influenced by investor sentiment--these results suggest that both equity issuance and mergers are to a significant extent driven by market-timing considerations, as opposed to by purely fundamental factors.
Keywords: Investor Sentiment; Corporate Finance; Equity Issuance; Mergers
JEL Codes: G14; G32; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investor sentiment (G41) | Net equity issuance (G12) |
| Aggregate stock returns (G12) | Net equity issuance (G12) |
| Firm-level returns (D21) | Net equity issuance (G12) |
| Investor sentiment (G41) | Merger activity (G34) |
| Aggregate stock prices (C43) | Merger activity (G34) |
| Firm-specific stock prices (G12) | Merger activity (G34) |
| Investor sentiment (G41) | Investment behavior (G11) |
| Aggregate stock prices (C43) | Investment behavior (G11) |
| Firm-specific stock prices (G12) | Investment behavior (G11) |