TY  - JOUR
AU  - DellaVigna,Stefano
AU  - Pollet,Joshua M.
TI  - Capital Budgeting vs. Market Timing: An Evaluation Using Demographics
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15184
PY  - 2009
Y2  - July 2009
UR  - http://www.nber.org/papers/w15184
L1  - http://www.nber.org/papers/w15184.pdf
N1  - Author contact info:
Stefano DellaVigna
University of California, Berkeley
Department of Economics
549 Evans Hall #3880
Berkeley, CA 94720-3880
Tel: 510/643-0715
Fax: 510/642-6615
E-Mail: sdellavi@econ.berkeley.edu

Joshua Pollet
College of Business
University of Illinois at Urbana-Champaign
4039 BIF
515 E. Gregory Drive
Champaign, IL 61820
Tel: 217-300-1961
E-Mail: pollet@illinois.edu
AB  - An ongoing debate sets capital budgeting against market timing. The primary difficulty in evaluating these theories is finding distinct exogenous proxies for investment opportunities and mispricing. We use demand shifts induced by demographics to address this problem, and hence, provide a more definitive analysis of the theories. According to capital budgeting, industries anticipating positive demand shifts in the near future should issue more equity (and debt) to finance additional capacity. To the extent that demographic shifts in the more distant future are not incorporated into equity prices, market timing implies that industries anticipating positive demand shifts in the distant future should issue less equity due to undervaluation. We find evidence supporting both capital budgeting and market timing: new listings and equity issuance by existing listings respond positively to demand shifts up to 5 years ahead, and negatively to demand shifts 5 to 10 years ahead.
ER  -