Equity Market Timing and Capital Structure: International Evidence

32 Pages Posted: 22 Jun 2007 Last revised: 20 Sep 2014

See all articles by Arvind Mahajan

Arvind Mahajan

Texas A&M University - Department of Finance

Semih Tartaroglu

Wichita State University

Abstract

We investigate the equity market timing hypothesis of capital structure in major industrialized (G-7) countries. As claimed by its proponents, we find that leverage of firms is negatively related to the historical market-to-book ratio in all G-7 counties. However, this negative relationship cannot be attributed to equity market timing. We find no association between equity issues and market-to-book ratios at the time of equity financing decisions by Japanese firms. Firms in all G-7 countries, except Japan, undo the effect of equity issuance and the impact of equity market timing attempts on leverage is short lived. This is inconsistent with the prediction of the equity market timing hypothesis and more in line with dynamic tradeoff model.

Keywords: Equity Market Timing, Capital Structure, Leverage, Dynamic Tradeoff, G-7 countries

JEL Classification: G32, G30, F39

Suggested Citation

Mahajan, Arvind and Tartaroglu, Semih, Equity Market Timing and Capital Structure: International Evidence. Journal of Banking and Finance, 32, 2008, 754-766. Available at SSRN: https://ssrn.com/abstract=993590

Arvind Mahajan (Contact Author)

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-845-4876 (Phone)

Semih Tartaroglu

Wichita State University ( email )

Department of Finance, Real Estate & Decision
Sciences (FREDS)
Wichita, KS 67260-0077
United States
(316) 978 7124 (Phone)

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