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How Persistent Is the Impact of Market Timing on Capital Structure?

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  • AYDOĞAN ALTI
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    Abstract

    This paper examines the capital structure implications of market timing. I isolate timing attempts in a single major financing event, the initial public offering, by identifying market timers as firms that go public in hot issue markets. I find that hot-market IPO firms issue substantially more equity, and lower their leverage ratios by more, than cold-market firms do. However, immediately after going public, hot-market firms increase their leverage ratios by issuing more debt and less equity relative to cold-market firms. At the end of the second year following the IPO, the impact of market timing on leverage completely vanishes. Copyright 2006 by The American Finance Association.

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    Bibliographic Info

    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 61 (2006)
    Issue (Month): 4 (08)
    Pages: 1681-1710

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    Handle: RePEc:bla:jfinan:v:61:y:2006:i:4:p:1681-1710

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    Cited by:
    1. DeAngelo, Harry & DeAngelo, Linda & Stulz, René M., 2010. "Seasoned equity offerings, market timing, and the corporate lifecycle," Journal of Financial Economics, Elsevier, vol. 95(3), pages 275-295, March.
    2. Mahajan, Arvind & Tartaroglu, Semih, 2008. "Equity market timing and capital structure: International evidence," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 754-766, May.
    3. Yang Ni & Shasha Guo & David E. Giles, 2009. "Capital Structures in an Emerging Market: A Duration Analysis of the Time Interval Between IPO and SEO in China," Econometrics Working Papers 0905, Department of Economics, University of Victoria.
    4. Alves, Paulo & Francisco, Paulo, 2013. "The Impact of Institutional Environment in Firms´ Capital Structure during the Recent Financial Crises," MPRA Paper 51300, University Library of Munich, Germany.
    5. Liu, Qigui & Tian, Gary, 2012. "Controlling shareholder, expropriations and firm's leverage decision: Evidence from Chinese Non-tradable share reform," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 782-803.
    6. Soumaya Hergli & Frederic Teulon, 2014. "Capital structure’s explanatory factors : The Maghreb case," Working Papers 2014-098, Department of Research, Ipag Business School.
    7. W. Allard Bruinshoofd & Leo de Haan, 2012. "Market timing and corporate capital structure: a transatlantic comparison," Applied Economics, Taylor & Francis Journals, vol. 44(28), pages 3691-3703, October.
    8. Gerhard Kling & Utz Weitzel, 2010. "Endogenous mergers: bidder momentum and market reaction," Applied Financial Economics, Taylor & Francis Journals, vol. 20(3), pages 243-254.
    9. Duc Khuong Nguyen & Adel Boubaker, 2009. "Does financing behavior of Tunisian firms follow the predictions of the market timing theory of capital structure?," Economics Bulletin, AccessEcon, vol. 29(1), pages 169-181.
    10. Jacob Oded & Allen Michel & Steven P. Feinstein, 2011. "Distortion in corporate valuation: implications of capital structure changes," Managerial Finance, Emerald Group Publishing, vol. 37(8), pages 681-696, August.
    11. Chen, Dar-Hsin & Chen, Chun-Da & Chen, Jianguo & Huang, Yu-Fang, 2013. "Panel data analyses of the pecking order theory and the market timing theory of capital structure in Taiwan," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 1-13.
    12. Thomas J. Chemmanur & Jie He, 2012. "IPO Waves, Product Market Competition, and the Going Public Decision: Theory and Evidence," Working Papers 12-07, Center for Economic Studies, U.S. Census Bureau.
    13. Liu, Laura Xiaolei, 2009. "Historical market-to-book in a partial adjustment model of leverage," Journal of Corporate Finance, Elsevier, vol. 15(5), pages 602-612, December.
    14. Zhaoxia Xu, 2009. "The Impact of Market Timing on Canadian and U.S. Firms' Capital Structure," Working Papers 09-1, Bank of Canada.
    15. Wu, Xueping & Au Yeung, Chau Kin, 2012. "Firm growth type and capital structure persistence," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3427-3443.
    16. Halil D. Kaya, 2011. "Syndicated bank loans and capital structure," Managerial Finance, Emerald Group Publishing, vol. 37(8), pages 697-714, August.
    17. Elsas, Ralf & Florysiak, David, 2008. "Empirical Capital Structure Research: New Ideas, Recent Evidence, and Methodological Issues," Discussion Papers in Business Administration 4743, University of Munich, Munich School of Management.
    18. Cai, Jie & Zhang, Zhe, 2011. "Leverage change, debt overhang, and stock prices," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 391-402, June.
    19. Alves, Paulo & Couto, Eduardo & Francisco, Paulo, 2014. "Board of directors’ composition and financing choices," MPRA Paper 52973, University Library of Munich, Germany, revised 2014.
    20. Sibel ÇELÝK & Yasemin Deniz AKARIM, 2013. "Does Market Timing Drive Capital Structure? Empirical Evidence from an Emerging Market," International Journal of Economics and Financial Issues, Econjournals, vol. 3(1), pages 140-152.
    21. Alessandro Fiaschi, 2009. "Managerial discretion and optimal financing policies with cash flow uncertainty," Working Papers 3, Doctoral School of Economics, Sapienza University of Rome.

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