Equity Issues, Creditor Control and Market Timing Patterns: Evidence From Leverage Decreasing Recapitalizations
46 Pages Posted: 22 Mar 2017 Last revised: 5 Nov 2020
Date Written: October 29, 2020
We contribute to the literature on “market timing” by exploring periods of simultaneous equity issues and debt retirements (a leverage decreasing recapitalization, LDR). We hypothesize and show that such LDRs are driven by measures of creditor control but are not predicted by capital investment. Nevertheless, we provide detailed evidence that LDRs occur after stock price run-ups and in periods of high valuation which subsequently decrease. The valuation dynamics are robust and also obtain for subsamples of LDR firms violating financial covenants. A pro-forma cash balance analysis further suggests these firms could have reduced discretionary expenses or sold assets to fund a significant debt retirement. Hence, LDR firms seem to “time the market”.
Keywords: equity issue; market timing; creditor control; financial reporting conservatism; covenants; pro-forma cash holdings
JEL Classification: G30, G32, G34, M40, M41
Suggested Citation: Suggested Citation