Hostname: page-component-848d4c4894-pftt2 Total loading time: 0 Render date: 2024-06-03T18:20:09.727Z Has data issue: false hasContentIssue false
  • English
  • Français

Are Observed Capital Structures Determined by Equity Market Timing?

Published online by Cambridge University Press:  06 April 2009

Armen Hovakimian
Armen Hovakimian
Affiliation:
armen-hovakimian@baruch.cuny.edu, Baruch College, The City University of New York, One Bernard Baruch Way, Box B 10–225, NY 10010.
Get access Rights & Permissions [Opens in a new window]

Abstract

Contrary to Baker and Wurgler (2002), I find that the importance of historical average market-to-book ratios in leverage regressions is not due to past equity market timing. Although equity transactions may be timed to equity market conditions, they do not have significant long lasting effects on capital structure. Debt transactions exhibit timing patterns that are unlikely to induce a negative relation between market-to-book ratios and leverage. I also find that historical average market-to-book ratios have significant effects on current financing and investment decisions, implying that they contain information about growth opportunities not captured by current market-to-book ratios.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 1 , March 2006 , pp. 221 - 243
Copyright
Copyright © School of Business Administration, University of Washington 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Baker, M., and Wurgler, J.. “Market Timing and Capital Structure.” Journal of Finance, 57 (2002), 1–32.Google Scholar
Barclay, M. J.; Smith, C.W.; and Watts, R. L.. “The Determinants of Corporate Leverage and Dividend Policies.” Journal of Applied Corporate Finance, 7 (1995), 4–19.Google Scholar
Bayless, M., and Chaplinsky, S.. “Expectations of Security Type and the Information Content of Debt and Equity Offers.” Journal of Financial Intermediation, 1 (1990), 195–214.CrossRefGoogle Scholar
Chang, X., and Dasgupta, S.. “Capital Structure Theories: Some New Tests.” Working Paper, Hong Kong Univ. of Science & Technology (2003).Google Scholar
DeAngelo, H., and Masulis, R.. “Optimal Capital Structure under Corporate and Personal Taxation.” Journal of Financial Economics, 8 (1980), 3–29.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Testing Trade-Off and Pecking Order Predictions about Dividends and Debt.” Review of Financial Studies, 15 (2002), 1–34.CrossRefGoogle Scholar
Fazzari, S.; Hubbard, G.; and Petersen, B.. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity (1988), 141–195.Google Scholar
Graham, J. R. “Debt and The Marginal Tax Rate.” Journal of Financial Economics, 41 (1996), 41–74.Google Scholar
Hart, O., and Moore, J.. “Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management.” American Economic Review, 85 (1995), 567–585.Google Scholar
Hovakimian, A. “The Role of Target Leverage in Security Issues and Repurchases.” Journal of Business, 77 (2004), 1–31.Google Scholar
Hovakimian, A.; Opler, T.; and Titman, S.. “The Debt-Equity Choice.” Journal of Financial and Quantitative Analysis, 36 (2001), 1–24.Google Scholar
Ikenberry, D.; Lakonishok, J.; and Vermaelen, T.. “Market Underreaction to Open Market Repurchases.” Journal of Financial Economics, 39 (1995), 181–208.CrossRefGoogle Scholar
Jalilvand, A., and Harris, R.. “Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study.” Journal of Finance, (1984), 127–144.Google Scholar
Jensen, M., and Meckling, W. H.. “Theory of The Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Kayhan, A., and Titman, S.. ”Firms' Histories and Their Capital Structure.” Working Paper, Univ. of Texas at Austin (2005).Google Scholar
Korajczyk, R., and Levy, A.. “Capital Structure Choice: Macroeconomic Conditions and Financial Constraints.” Journal of Financial Economics, 68 (2003), 75–109.CrossRefGoogle Scholar
Leary, M. T., and Roberts, M. R.. “Do Firms Rebalance Their Capital Structures?” Journal of Finance, forthcoming (2005).Google Scholar
MacKie-Mason, J. K. “Do Firms Care Who Provides Their Financing?” Hubbard, R. G., ed., Asymmetric Information, Corporate Finance, and Investment. National Bureau of Economic Research Project Report, Chicago and London: Univ. of Chicago Press (1990), 63–104.Google Scholar
Marsh, P. “The Choice between Equity and Debt: An Empirical Study.” Journal of Finance, 37 (1982), 121–144.CrossRefGoogle Scholar
Modigliani, F., and Miller, M.. “Corporate Income Taxes and The Cost of Capital: A Correction.” American Economic Review, 53 (1963), 433–443.Google Scholar
Myers, S. C. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.Google Scholar
Myers, S. C., and Majluf, N.. “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–221.CrossRefGoogle Scholar
Rajan, R. G., and Zingales, L.. “What Do We Know About Capital Structure? Some Evidence From International Data.” Journal of Finance, 50 (1995), 1421–1460.CrossRefGoogle Scholar
Ross, S. A. “The Determination of Financial Structure: The Incentive-Signaling Approach.” Bell Journal of Economics, 8 (1977), 23–40.CrossRefGoogle Scholar
Shyam-Sunder, L., and Myers, S. C.. “Testing Static Tradeoff against Pecking Order Models of Capital Structure.” Journal of Financial Economics, 51 (1999), 219–244.Google Scholar
Smith, C. W., and Watts, R. L.. “The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies.” Journal of Financial Economics, 32 (1992), 263–292.Google Scholar
Stulz, R. “Managerial Discretion and Optimal Financing Policies.” Journal of Financial Economics, 26 (1990), 3–28.Google Scholar
Titman, S., and Wessels, R.. “The Determinants of Capital Structure Choice.” Journal of Finance, 43 (1988), 1–18.Google Scholar
Welch, I. “Capital Structure and Stock Returns.” Journal of Political Economy, 112 (2004), 106–131.Google Scholar