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Review of Finance Advance Access published online on July 17, 2009
Review of Finance, doi:10.1093/rof/rfp012
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The Authors 2009. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Corporate Financing Activities and Contrarian Investment*

Turan G. Bali1, K. Ozgur Demirtas2 and Armen Hovakimian3

1 Zicklin School of Business
2 Baruch College
3 City University of New York

This paper investigates the risk versus mispricing explanation of superior returns to contrarian strategies using the interactions between value-to-market indicators and corporate financing transactions that increase or decrease a firm's outstanding equity. Portfolio-level analyses and firm-level cross-sectional regressions indicate that the well-documented contrarian profits soar when value stocks which repurchase shares (value repurchasers) and growth stocks which issue shares (growth issuers) are considered. Various risk measures indicate that value repurchasers are not riskier than growth issuers. Furthermore, time-series of realized growth rates, analysts' long-term growth estimates, and sensitivity of portfolio returns to investor sentiment support the misvaluation explanation.

JEL Classification: G10, G11, G12, G14

* We thank Josef Zechner (the editor) and two anonymous referees for their helpful comments and suggestions. We would also like to thank Andrew Ang, George Aragon, Wayne Ferson, Tim Loughran, John Merrick, Jeffrey Pontiff, Robert Schwartz, Sheridan Titman, Robert Whitelaw, Liuren Wu and seminar participants at Penn State University. Turan Bali gratefully acknowledges the financial support from the Research Foundation of Stern School of Business, NYU. K. Ozgur Demirtas gratefully acknowledges the financial support from the PSC-CUNY Research Foundation of the City University of New York and Eugene M. Lang Research Foundation. Armen Hovakimian gratefully acknowledges the financial support from the PSC-CUNY Research Foundation of the City University of New York.


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