Market timing and capital structure. IEEE Xplore 2019-02-23

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Market timing hypothesis

market timing and capital structure

The main finding is that low leverage firms are those that raised funds when their market valuations were high measured by the book-to-market ratio , while high leverage firms are those that raised funds when their market valuations were low. Copyright The American Finance Association 2002. Baker and Wurgler themselves show that an of financing that reflects how much of the financing was done during and how much during is a good indicator of firm over long periods subsequently. The effect of market-to-book on changes in leverage does indeed come through equity issues. The market-to-book ratio can be connected to several elements of the tradeoff theory but it is most commonly attached to costly financial distress. This allows them to determine whether market-to-book affects leverage through net equity issues, as market timing implies.

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Market Timing and Capital Structure for Baker and Wurgler Essay

market timing and capital structure

This is true whether decision makers are behavioral or rational. The authors conclude that capital structure is the result of past efforts by managers to time the equity market. The pecking order theory regards the market-to-book ratio as a measure of investment opportunities. Stock price run-ups increase the probabilities of equity and dual issues. The concurrent increase in equity issues is suggestive of market timing.

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Market Timing and Capital Structure (Digest Summary)

market timing and capital structure

Therefore the main idea of all those results is that market-to-book affectsleverage through net equity issues. It therefore gives more weight to valuations that prevailed when significant external financing decisions were being made, whether those decisions ultimately went toward debt or equity. This variable takes high values for firms that raised external finance when the market-to-book ratio was high and vice-versa. Second, historically high market valuations are associated with lower leverage in the cross section. You can help correct errors and omissions.


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Market Timing and Capital Structure

market timing and capital structure

The tradeoff theory predicts that temporary fluctuations in the market-to-book ratio or any other variable should have temporary effects. Market Timing and Capital Structure Digest Summary Abstract The authors use regression analysis to evaluate the determinants of capital structure. Some of the key trends in the capital structure of India Inc. The authors conclude that managers time the equity market because investors' overconfidence provides managers with opportunities to finance at low costs. Please check the 'Copyright Information' section for details of this license and what re-use is permitted. There have been numerous works published on the subject which have presented such theories as the Modigliani and Miller Propositions, the Trade-off Theory, Pecking Order Theory, Signalling Theory and Agency Cost Theory to name a few. Further, the effects of stock price run-ups on the choices between issuance of debt, equity or both are consistent with the predictions of the market timing hypothesis.

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IEEE Xplore

market timing and capital structure

Market-timing theories based on adverse-selection costs or mispricing of securities and survey data show that managers attempt to time the market. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market. Rather it just assumes these mis-pricing exists, and describes the behavior of firms under the even stronger assumption that firms can detect this mis-pricing better than can. Pecking order theory In the pecking order theory there is no optimal capital structure. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market. Capital structure and past market valuations Individual financing decisions depend on market-to-book ratios.

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Market Timing and Capital Structure

market timing and capital structure

The influence of past market valuations on capital structure is also quite persistent, this means that they have a long-run impact. Firms in all G-7 countries, except Japan, undo the effect of equity issuance and the impact of equity market timing attempts on leverage is short lived. The theory of entrenched managers suggests that managers exploit existing investors ex post by not rebalancing the capital structure with debt, this may be an explanation of the findings in this paper. The results yield evidence of market timing. Panel C shows that market-to-book is not strongly related to retained earnings, ruling out the possibility that market-to-book affects leverage because it forecasts earnings. Then they decompose the change in leverage to examine whether the effects comes through net equity issues, as market timing implies.

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Market timing hypothesis

market timing and capital structure

The concurrent increase in equity issues is suggestive of market timing. Regressions that decompose the change in leverage into equity issues, retained earnings growth, and asset growth show that net equity issues are the main source of this effect. Three control variables are used that have been found to be correlated to leverage: Asset tangibility, profitability, and firm size. The typical version of the market timing hypothesis is thus somewhat incomplete as a matter of theory. Mirie Mwangi September - December 2013 Submitted in partial fulfilment of the requirements of the Masters in Business Administration degree at the University of Nairobi.

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Market Timing and Capital Structure (Digest Summary)

market timing and capital structure

Historical market valuations have large and very persistent effects on capital structure. We investigate the equity market timing hypothesis of capital structure in major industrialized G-7 countries. Anotherinteresting result is that market-to-book is not strongly related to retained earnings. . Many other theories like Agency theory and Pecking order theory have generally recognized the relevance of capital structure to the value of a. First, high market valuations reduce leverage in the short run.

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Equity market timing and capital structure: International evidence

market timing and capital structure

The tradeoff theory predicts that temporary fluctuations in the market-to-book ratio or any other variable should have temporary effects. However, evidence indicated that variation in the market-to-book ratio has a decades-long impact on capital structure. We document that the resulting effects on capital structure are very persistent. The most realistic explanation for the results is that capital structure is largely the cumulative outcome of past attempts to time the equity market. As a consequence, current capital structure is strongly related to historical market values.

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