Pseudo Market Timing: Fact or Fiction?

39 Pages Posted: 28 Oct 2004

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Frank De Jong

Tilburg University - Department of Finance

Date Written: September 2004

Abstract

The average firm going public or issuing new equity underperforms the market in the long run. A potential explanation of this long-run underperformance has to do with the endogeneity of the number of new issues. That is, due to the clustering of events after periods of high abnormal returns in issues, ex post measures of average abnormal returns may be negative on average despite zero ex ante abnormal returns. This could lead one to incorrectly infer underperformance. We provide a thorough evaluation of the endogeneity problem in event studies as it relates to long-run underperformance and undertake both theoretical and simulation analyses. We argue that it is unlikely that the endogeneity of the number of new issues explains the long-run underperformance in equity issuances.

Keywords: Abnormal return measures, endogenous events, event studies, initial public offerings, long-run underperformance, pseudo market timing

JEL Classification: C33, G14, G32

Suggested Citation

Dahlquist, Magnus and De Jong, Frank, Pseudo Market Timing: Fact or Fiction? (September 2004). Available at SSRN: https://ssrn.com/abstract=611561

Magnus Dahlquist (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Frank De Jong

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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