Do managers have market timing ability in firms issuing and repurchasing equity

Several studies find little evidence that insider trading around primary seasoned equity offerings (SEOs) and open-market repurchase announcements can predict future returns, raising doubts that managers could be knowingly timing the market with these corporate decisions. In the first chapter I show that long-run returns after SEOs are significantly related to prior insider trading activity when returns are measured from the announcement date rather than the issue date as in previous studies. The result arises because a significant proportion of the market reaction to the insider signals occurs between the announcement and issue dates. Furthermore, using repurchase announcements to identify firms that are potentially taking advantage of underpriced shares omits firms that are acting under previously announced buyback programs and includes firms that announce but do not actually repurchase shares. Although the results for firms announcing repurchases are inconsistent, insider signals robustly predict long-run returns for firms making net reductions to common equity outstanding. Overall, the evidence is consistent with the version of the market timing hypothesis in which managers possess superior information about firm values.;These findings, however, raise the question of why insider trading regulations do not prevent informed trading by managers before SEO and repurchase announcements. The second chapter analyzes civil insider trading cases brought by the Securities and Exchange Commission in the period between 1990 and 2007. I find that enforcement activity is heavily concentrated in cases involving mergers and earnings announcements, but is almost completely absent for cases involving many other corporate events, including SEOs and repurchases. Company insiders are significantly more likely to make informed trades before announcements for events with no SEC enforcement precedent as well as those with low enforcement activity over time. The results are consistent with enforcement influencing insiders' perceived risk of trading beyond the mere existence of insider trading prohibitions.