Market timing and the debt-equity choice

William Elliott, Johanna Koëter-Kant and Richard S. Warr

Journal of Financial Intermediation, 2008, vol. 17, issue 2, 175-197

Abstract: We test the market timing theory of capital structure using an earnings-based valuation model that allows us to separate equity mispricing from growth options and time-varying adverse selection; thus avoiding the multiple interpretations of book-to-market ratio. We find that equity market mispricing plays a significant, if not dominant, role in the security choice decision. Our results are robust to the inclusion of proxies for time-varying growth options and alternate methods of measuring misvaluation.

Keywords: Capital; structure; Market; timing; Security; choice; Mispricing; Earnings-based; valuation; Residual; income; model (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:17:y:2008:i:2:p:175-197

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