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Finance and Economics Discussion Series
The Finance and Economics Discussion Series logo links to FEDS home page Why Does the Change in Shares Predict Stock Returns
William R. Nelson

Abstract: The stock of firms that issue equity has, on average, performed poorly in subsequent years, while the stock of firms that repurchase has typically done well. One explanation for this pattern is that firms are exploiting their superior knowledge about the value of their stock by buying it when it is undervalued and selling it when it is overvalued. This paper presents supporting evidence for this explanation of the excess returns: The change in shares outstanding is positively correlated with proxies for the deviation of current stock price from fundamental value; the excess returns following the change in shares remain significant after controlling for these proxies; and the changes in shares that can be explained by the proxies predict stock returns more powerfully than changes in shares explained by other reasons.

Keywords: Equity issuance, equity repurchase, excess returns

Full paper (158 KB PDF) | Full paper (309 KB Postscript)

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Last update: March 17, 1999