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1、Market Timing and Capital Structure Motivation 1: The exist of “equity market timing”. Firms tend to issue equity when market value is high, relative to book value and past market values, and repurchase equity when market value is low. The findings are difficult to reconcile with the MMs capital str
2、ucture irreverent theory. In inefficient or segmented capital markets, market timing benefits ongoing shareholders at the expense of entering and exiting ones. Managers thus have incentives to time the market. 2 Motivation 2: Many corporate financing decisions depend on equity market timing. There i
3、s evidence in four different kinds of studies. studies findings financing decisions firms tend to issue equity instead of debt when market value is high and tend to repurchase equity when market value is low long-run stock returns equity market timing is successful on average earnings forecasts firm
4、s tend to issue equity at times when investors are rather too enthusiastic about earnings prospects market timing surveys managers admit to market timing 3 Purpose and conclusion 1: We would like to know how equity market timing affects capital structure. The basic question is whether market timing
5、has a short-run or a long-run impact. One expects at least a mechanical, short-run impact. If firms subsequently rebalance away the influence of market timing financing decisions, then market timing would have no persistent impact on capital structure. The conclusion is that market timing has large,
6、 persistent effects on capital structure. 4 Purpose and conclusion 2: The results are explained with some theory of capital structure. Theory Views Result Trade-off theory Market-to-book is an indicator of investment opportunities, risk, agency, or some other determinant of the optimal tradeoff betw
7、een equity and debt. inconsistent Pecking order theory Firms with upcoming investment opportunities may reduce leverage to avoid issuing equity in the future. Inconsistent Managerial entrenchme nt theory High market valuations allow managers to add equity but also allow them to become entrenched, re
8、sisting the debt finance necessary to restore debt to the optimum. consistent Market timing theory Capital structure is the cumulative outcome of attempts to time the equity market. consistent 5 Capital Structure and Past Market Valuations Data The whole sample includes 2,893 observations on firms t
9、hat went public between 1968 and 1998. We require an IPO date for two reasons: The IPO is itself an important financing decision that is connected empirically to the market-to-book ratio. Allow us to study the evolution of capital structure. We exclude financial firms, firms with a minimum book valu
10、e of assets below $10 million, firms without complete data on total assets, and individual firm-year outliers for capital structure (book leverage is above one) and the market-to-book ratio (whic is above 10). 6 Summary Statistics 7 The main result of table I: The exist of equity market timing Book
11、leverage decreases sharply following the IPO. Over the next 10 years, it rises slightly, while market value leverage rises more strongly; this is indeed an age effect, not a survival effect. The decrease in market leverage reflects the historically high market valuations prevailing at the end of the
12、 1990s. The concurrent increase in equity issues is suggestive of market timing. 8 Determinants of Annual Changes in Leverage Here we decompose the change in leverage to examine whether the effect comes through net equity issues, as market timing implies. We also use three other variables that Rajan
13、 and Zingales (1995) find to be correlated to leverage in several developed countries: asset tangibility, profitability, and firm size. 9 10 The results of panel A of table II are generally consistent with theoretical priors. Variables (lagged value) Expected sign Empirical sign M/B ratio - - PPE/A
14、ratio + + EBITDA/A ratio + or - - Log (S) + + f (D/A) When leverage is near one of these boundaries, the change in leverage can only go in one direction, regardless of the values of the other variables. 11 The change in leverage can be decomposed as follows: To regress each of these three components
15、 of changes in leverage on the market-to-book ratio and the other independent variables. 12 We further examine whether market-to-book affects leverage through net equity issues, as market timing implies. The clear result is that market-to-book affects leverage through net equity issues. 13 Two inter
16、esting patterns are worth noting: The effect of profitability on changes in leverage arises primarily because of retained earnings. Profitable firms issue less equity (+), but this effect is more than offset by higher retained earnings(-), so that the net effect of higher profits is to reduce leverage. Firm size plays an important
