Do Firms Time the Equity Market in a Non-Linear Manner? Evidence from the UK
Hafezali Iqbal Hussain
The International Journal of Business and Finance Research, 2014, vol. 8, issue 4, 63-74
We provide an empirically motivated study to test the market timing theory of capital structure. The objective is to understand how managers in the United Kingdom finance their deficit. In line with the extant literature, we find that managers place greater reliance equity issues to finance deficit during periods of overvaluation and correspondingly increase debt issues when equities are undervalued. We further find that managers time the equity market in a surprisingly unique manner. Managers attempt to time issues in a non-linear manner whereby the increase in reliance on equity issues is only evident when the extent of overvaluation is not excessive. In addition, firms finance deficits with higher proportions of debt when equity prices are acutely suppressed. Our findings raise some important questions, which lead to serious implications on equity market-timing as a viable explanation for capital structure decisions. Furthermore, it poses serious implications questioning the debt-equity ratio preference of managers when resorting to external financing.
Keywords: Equity Market Timing; Capital Structure (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ibf:ijbfre:v:8:y:2014:i:4:p:63-74
Access Statistics for this article
The International Journal of Business and Finance Research is currently edited by Terrance Jalbert
More articles in The International Journal of Business and Finance Research from The Institute for Business and Finance Research
Bibliographic data for series maintained by Mercedes Jalbert ().