Net Share Issuance and Asset Growth Effects: The Role of Managerial Incentives

doi:10.1080/0015198X.2019.1682427

Shingo Goto
Zhao Wang
Shu Yan

By considering executives’ stock holdings (incentives) alongside their decisions over equity buybacks/issuance and asset growth, investors can discern companies likely to outperform.

By considering executives’ stock holdings (incentives) alongside their decisions over equity buybacks/issuance and asset growth, investors can discern companies likely to outperform. In the presence of asymmetric information, managerial equity incentives mitigate company managers’ empire-building motives while increasing their market-timing motives. If the market underreacts to these motives, the negative return predictability by net share issuance (NSI) and asset growth (AG) should be more pronounced among stocks with, respectively, larger managerial equity incentives and smaller managerial equity incentives. Our evidence supports this prediction. A hybrid strategy that exploited the NSI and AG effects in different groups of stocks screened by managerial equity incentives attained significant alphas after transaction costs, even after we controlled for the investment and profitability factors known to attenuate the two effects.

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