Public Equity Issues and the Scope for Market Timing

Abstract:     
This paper tests whether and how market timing explains public equity offerings and consequently firm leverage. Prior research has subsumed two mechanisms under the market timing terminology. One is a mispricing mechanism with irrational investors or managers, the other is due to fluctuations in adverse selection costs. Using a comprehensive sample of SEO and IPO firms I find no support for the mispricing mechanism, but evidence consistent with the adverse selection mechanism. When asymmetric information is low, firms rationally issue equity to finance future investment. Moreover, equity is not mispriced when issued. Inconsistent with both market timing arguments however, issuing firms releverage through increased debt issues and within three years eliminate the impact of market timing on leverage.

Number of Pages in PDF File: 48

Keywords: capital structure, initial public offering, market timing, seasoned equity offering

JEL Classification: G14, G32

working papers series