Dynamic Capital Structure with Heterogeneous Beliefs and Market Timing

54 Pages Posted: 1 Jan 2011 Last revised: 27 Jun 2013

Baozhong Yang

Georgia State University - Robinson College of Business

Date Written: June 14, 2013

Abstract

This paper builds a dynamic trade-off model of corporate financing with differences in belief between the insider manager and outside investors. The optimal leverage depends on differences of opinion and can differ significantly from that in standard trade-off models. The manager's market timing behavior leads to several stylized facts, such as the low average debt ratios of firms in the cross section, the substantial presence of zero-debt firms that pay larger dividends and keep higher cash balances than other firms, and negative long-run abnormal returns following stock issuance. Market timing behavior leads to substantial losses of firm value through excessive financing activities. Market timing and debt conservatism depend negatively on shareholder control of the firm.

Keywords: capital structure, heterogeneous beliefs, market timing, zero-debt firms, debt conservatism

JEL Classification: G31, G32, G34, G35

Suggested Citation

Yang, Baozhong, Dynamic Capital Structure with Heterogeneous Beliefs and Market Timing (June 14, 2013). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1732870 or http://dx.doi.org/10.2139/ssrn.1732870

Baozhong Yang (Contact Author)

Georgia State University - Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States
404-413-7350 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www2.gsu.edu/~fncbyy/index.html

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