Recent papers have shown that managers time their equity offerings based on the value of share prices relative to the book value of the firm or recent share price changes. We take advantage of unique attributes of real estate investment trusts (REITs) to show that managers' equity issuance and repurchase decisions are strongly impacted by perceived deviations in the relative value of their share prices. We have two principal findings. First, the ratio of price to net asset value (NAV) has strong explanatory power in predicting whether managers issue or repurchase shares. Furthermore, this relationship is non-linear. Managers rarely issue equity when price-to-NAV is below one and rarely repurchase shares when price-to-NAV exceeds unity. Second, we also show that the information available about REITs is an important factor in determining the stock market response to announcements of share issuances and repurchases. Stock prices respond much more strongly to announcements of issuances and repurchases for firms where no good estimates of NAV are available. For REITs with available NAV estimates, we find that the announcement effect depends heavily on the price-to-NAV ratio. In fact, for REITs with a price-to-NAV ratio of one, we cannot reject that the announcement effect equals zero for both repurchases and seasoned equity offerings. Taken together, our results suggest that investors are aware of managers' attempts to time the equity market.
Mayer, Christopher, and William Gentry. "The Effects of Share Prices Relative to Fundamental Value on Stock Issuances and Repurchases." Working paper, Columbia Business School, January 2003.
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