Does market timing drive capital structures

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Does market timing drive capital structures?

• Tijs de Bie Leo de HaanDutch Central Bank

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Capital structure theory

• The static trade-off theory firms have optimal
  capital structures depending on tax-advantage,
  financial distress, agency costs, etc.
• The pecking order theory preference to use
  internal over external finance, related to the
  adverse selection problem.
• Market timing firms issue equity when perceived
  to be overvalued and buy back in case of
  undervaluation

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Data for study

• Data from Jaarboek van Nederlandse
  Ondernemingen.
• Initial sample consists of 156 Dutch
  non-financial listed companies on the Amsterdam
  Stock Exchange (AEX)
• Period of study is 1983-1997
• We use two samples one in calendar time (135)
  and one in Ipo-time (45)
• Definition of variables follow definitions as
  used by US studies with CompuStat data

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Data for study - characteristics
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The external finance weighted average M/B (EFWAMB)

• Introduced by Baker and Wurgler (2002)

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Evidence for Dutch firms - Leverage
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Yearly Timing and Long-term Timing

• Kayhan and Titman (2004) criticize Baker and
  Wurglers EFWAMB-timing measure
  

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Evidence for Dutch firms - Changes in leverage
(continued)
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Direct ways of observing market timing (1)
classification of issuance by stock performance

• Stock price runups prompt firms to issue more,
  especially more debt.

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Direct ways of observing market timing (2A)
mean and median changes in leverage ratios

• Equity issues reduce leverage, debt issues
  increase leverage, dual issues increase leverage.

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Direct ways of observing market timing (2B)
mean and median changes in market-to-book ratios

• Equity issues occur after a significant increase
  of the M/B

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Direct ways of observing market timing (2C)
mean and median changes in the stock price

• Equity and debt issues occur after a stock price
  increase

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Probit analysis of debt and equity issues

• Stock return has a positive effect on the
  issuance of equity.

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Probit analysis of debt and equity issues

• Stock returns do not drive debt issues.

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Probit analysis of debt and equity issues

• Stock return has no significant effect on dual
  versus equity issues. This is in accordance with
  market timing c.q. pecking order (Hovakimian et
  al., 2004).

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Conclusions

• Leverage of our sample of Dutch firms does not
  appear to be affected by market timing.
• Nor does market-to-book affect leverage
  significantly.
• This finding is in contrast with studies for US
  firms, e.g. Baker and Wurgler (2002) and Kayhan
  and Titman (2004).
• Still, earlier evidence of market timing of
  equity issues by Dutch firms is confirmed.