Corporate financing decisions, managerial market timing, and real investment

Both market timing and investment-based theories of corporate financing predict underperformance after firms raise capital, but only market timing predicts that the composition of financing (equity compared to debt) should also forecast returns. In cross-sectional tests, we find that the amount of net financing is more important than its composition in explaining future stock returns. In the timeseries, investment-based factor models explain abnormal stock performance following a variety of corporate financing events that previous studies link to market timing. At the aggregate level, the amount of new financing is also more important for future market returns than its composition. Overall, our joint tests reveal that measures of real investment are correlated with future returns while measures of managerial market timing are not.