What Drives Security Issuance Decisions: Market Timing, Pecking Order, or Both?

45 Pages Posted: 3 Mar 2008 Last revised: 13 Feb 2011

See all articles by Ming Dong

Ming Dong

York University - Schulich School of Business

Igor Loncarski

University of Ljubljana - Faculty of Economics

Jenke ter Horst

TIAS School for Business and Society

Chris Veld

Monash University

Date Written: February 10, 2011

Abstract

We study the interaction between market timing and pecking order in the financing decision of firms. Using a sample of debt and equity issues and share repurchases of Canadian firms during 1998-2007, we find that only when firms are not financially constrained, they are more likely to issue (repurchase) equity when their shares are overvalued (undervalued), and post-announcement long-run returns are lower for overvalued firms. These findings are more consistent with the market timing theory than rational financing theories. We also find support for the pecking order theory which predicts that firms prefer debt to equity financing unless they are financially constrained, but this result only holds for firms that are not overvalued. These findings highlight an interaction between the effects of market timing and pecking order: firms time the market in issuing or repurchasing equity only when they are not financially constrained, and pecking order is most likely to hold among undervalued firms.

Keywords: Security issuance choice, market timing, pecking order, multinomial choice model

JEL Classification: G30, G32

Suggested Citation

Dong, Ming and Lončarski, Igor and ter Horst, Jenke R. and Veld, Chris, What Drives Security Issuance Decisions: Market Timing, Pecking Order, or Both? (February 10, 2011). Available at SSRN: https://ssrn.com/abstract=1085359 or http://dx.doi.org/10.2139/ssrn.1085359

Ming Dong (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext. 77945 (Phone)
416-736-5687 (Fax)

Igor Lončarski

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, SI-1000
Slovenia
+386 5892 628 (Phone)
+386 5892 698 (Fax)

Jenke R. Ter Horst

TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Chris Veld

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

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