Exploiting the persistence in managerial market timing

Some firms time their share issuances/repurchases using their private information while others do not. We identify successful timers by comparing a cash-flow-based measure of net share issuance (NSI) with a share-based measure. Recent successful timers—only a small fraction (23%)—drive the known return predictability of NSI in the following year. The evidence suggests that the stock market underreacts to the persistence of managerial market-timing, providing significant opportunities for investors to mimic successful market-timing in their investment strategies. A value-weighted NSI hedge portfolio formed only on recent successful timers earns a six-factor alpha of 11.8% a year after transaction costs

The duality of value and mean reversion

This chapter examines how the value and long-term return reversal or “mean reversion�? strategies are related and what makes them different. Comparing risk-return characteristics in backtests, the authors find that the performance of the value strategy dominates the performance of a mean-reverting strategy. They further establish that relative price-to-book-value (P/B) ratios are strong predictors of mean reversion; thus, they conclude, selling high P/B stocks and buying low P/B stocks is a sound rule for rebalancing a value portfolio. The authors also demonstrate that, unlike security prices, company fundamentals are not mean-reverting. By controlling for objective information about company fundamentals, P/B ratios help distill the mean-reverting component of stock prices reflecting only transitory effects of investors’ trades. The authors infer that the value strategy gains a performance advantage over the mean reversion strategy because it is attuned to a purer signal