External Financing and Cross-Sectional Returns: A Global Analysis

Net external financing predicts cross-sectional returns in a large sample of firms drawn from 38 non-U.S. countries. In contrast, the proportion of net equity issues in total net financing, often used to measure the extent of managerial market timing, does not. With a strong cross-firm association between net external financing and investment growth rates, this suggests that firms’ real investment behavior rather than their strategic switching between equity and debt financings contains information relevant to future returns. Despite its popularity in the literature, the behavioral market-timing effect is absent globally even among countries with weak investor protection, limited corporate disclosure, and less developed financial markets.