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Equity market timing and capital structure: International evidence

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  • Mahajan, Arvind
  • Tartaroglu, Semih
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    Abstract

    We investigate the equity market timing hypothesis of capital structure in major industrialized (G-7) countries. As claimed by its proponents, we find that leverage of firms is negatively related to the historical market-to-book ratio in all G-7 countries. However, this negative relationship cannot be attributed to equity market timing. We find no association between equity issues and market-to-book ratios at the time of equity financing decisions by Japanese firms. 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. This is inconsistent with the prediction of the equity market timing hypothesis and more in line with dynamic trade-off model.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 32 (2008)
    Issue (Month): 5 (May)
    Pages: 754-766

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    Handle: RePEc:eee:jbfina:v:32:y:2008:i:5:p:754-766

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    Web page: http://www.elsevier.com/locate/jbf

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    References

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    Cited by:
    1. Verwijmeren, Patrick & Derwall, Jeroen, 2010. "Employee well-being, firm leverage, and bankruptcy risk," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 956-964, May.
    2. Hamed Ahmadinia & Javad Afrasiabishani & Elham Hesami, 2012. "A Comprehensive Review on Capital Structure Theories," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 15(45), pages 3-26, September.
    3. Lyandres, Evgeny & Zhdanov, Alexei, 2010. "Accelerated investment effect of risky debt," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2587-2599, November.
    4. Ferris, Stephen P. & Jayaraman, Narayanan & Sabherwal, Sanjiv, 2009. "Catering effects in corporate dividend policy: The international evidence," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1730-1738, September.

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