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Market timing and the debt-equity choice

  • Elliott, William B.
  • Koëter-Kant, Johanna
  • Warr, Richard S.

We test the market timing theory of capital structure using an earnings-based valuation model that allows us to separate equity mispricing from growth options and time-varying adverse selection; thus avoiding the multiple interpretations of book-to-market ratio. We find that equity market mispricing plays a significant, if not dominant, role in the security choice decision. Our results are robust to the inclusion of proxies for time-varying growth options and alternate methods of measuring misvaluation.

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File URL: http://www.sciencedirect.com/science/article/B6WJD-4P0X5BY-1/2/e9b61c01e553ca6ebf01ad8018aaff24
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Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 17 (2008)
Issue (Month): 2 (April)
Pages: 175-197

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Handle: RePEc:eee:jfinin:v:17:y:2008:i:2:p:175-197
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622875

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