Market Timing on Oslo Stock Exchange: A Two-dimensional Analysis of Long-term Abnormal Stock Price Performance Following Equity Issues

Abstract

I analyze the time-variation of long-term risk-adjusted abnormal stock price underperformances following equity issues on Oslo Stock Exchange between 1997 and 2011. Market timing effects are analyzed within a two dimensional framework reflecting both the pre-issue stock market performance and the short-term activity level in the equity capital market. An adjusted version of the Fama-French three-factor model is used for the risk-adjustment of stock returns. The long-term underperformance is highest following issues in periods of high activity in the equity capital market and following issues in periods of bad pre-issue stock market performance. This is explained by companies exploiting investor over-optimism as well as a failure by models to capture systematic differences in the motivations for equity issues. The results indicate that companies on average are successful on timing the market in order to benefit existing shareholders as well as marketing their issues to imply promising growth opportunities. Further, I find a long-term trend suggesting that the underperformance effect on Oslo Stock Exchange is diminishing.