The Long-run Effect of Market Timing on Capital Structure: Evidence from Taiwan
Date Issued
2007
Date
2007
Author(s)
Yeh, Wei-Yi
DOI
en-US
Abstract
Abstract
Numerous prior research have document that firms are more likely to choose equity as the preferred financing method when the market values of their stocks are high, relative to book and past market values, and to repurchase equity when their market values are low. It is important to find out whether these temporary fluctuations in capital structures eventually smooth out and gradually drift to the long-term leverage targets or stay as they are and remain as the cumulative outcome of past attempts to time the equity market. If equity market timing can indeed be observed in the long-run, high persistence of market timing effects would imply that firms do not have a target or optimal leverage, suggesting a diminished role for traditional determinants of capital structure.
This paper mainly examines the relationship between leverage ratio and the market-to-book ratio. Consistent with the market timing theory of capital structure, Taiwanese companies issue much more equity when the relative cost of equity capital is low. In addition, the historical within-firm variation in the market-to-book ratio is as important as the current cross-firm variation in explaining current leverage. More specifically, current capital structure is strongly related to historical market values and the effects of the market-to-book ratio prevailing at the IPO on capital structure are very persistent five years after the IPO. The results suggest that current leverage ratio is the aggregated result of past financing decisions and that equity market timing does have at least a medium term effect on capital structure.
Subjects
市場時機
資本結構
股價淨值比
market timing
capital structure
market-to-book ratio
Type
thesis