How well do market timing, catering, and classical theories explain corporate decisions?

How well do market timing, catering, and classical theories explain corporate decisions?

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Article ID: iaor201112335
Volume: 34
Issue: 2
Start Page Number: 217
End Page Number: 239
Publication Date: Jun 2011
Journal: Journal of Financial Research
Authors:
Keywords: management
Abstract:

An important debate in corporate finance is whether chief executive officers (CEOs) exploit equity mispricing. In this article I construct a measure of the unexplained change in the CEO's stockholdings of the firm to empirically test the contrasting predictions of market timing, catering, and classical theories of corporate decisions. Consistent with the predictions of classical theories, I find that the firm increases its investments and even uses expensive capital to finance investments when there is an unexplained increase in the CEO's stockholdings. However, I find no empirical support for catering predictions and weak empirical support for market timing predictions.

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