Are Observed Capital Structures Determined by Equity Market Timing?

Abstract

Contrary to Baker and Wurgler (2002), we find that the importance of historical average market-to-book in leverage regressions is not due to past equity market timing. We find that only equity issues may be timed to conditions in equity market, but they do not have significant long-lasting effects on capital structure. Other transactions exhibit timing patterns that are unlikely to induce a negative relation between market-to-book and leverage. We also find that historical average market-to-book has a significant effect on current financing and investment decisions, implying that it contains information about growth opportunities not captured by current market-to-book.

Keywords: equity market timing, equity issues, capital structure, leverage

JEL Classification: G32