GM, L&D, let me present the article “Market Timing and Capital Structure” which was published in “The Journal of Finance” by MALCOLM BAKER and JEFFREY WURGLER in 2002. The authors believe that the idea from their work “has not been articulated before”.
In this paper, the authors ask how equity market timing affects capital structure. The basic question is whether market timing has a short-run or a long-run impact. One expects at least a mechanical, short-run impact. However, if firms s’ubsequently reb’alance away the influence of market timing financing decisions, as normative capital structure theory recommends, then market timing would have no persistent impact on capital structure. The significance of market timing for capital structure is therefore an empirical issue.
The results are consistent with the hypothesis that market timing has large, persistent effects on capital structure. The main finding is that low leverage firms are those that raised funds when their market valuations were high, while high leverage firms are those that raised funds when their market valuations were low. The authors document this in traditional capital structure regression, where leverage is the dependent variable and the market-to-book ratio is the independent variable. The basic regression result is that leverage is strongly negatively related to the historical market valuations.
So, the influence of past market valuations on capital structure is economically significant and statistically robust. The relationship is apparent whether leverage is measured in book or market values or whether various control variables are included. The bottom line is that fluctuations in market value have very long-run impacts on capital structure. It is hard to explain this result within traditional theories of capital structure. In the trade-off theory, market-to-book is an indicator of