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Market Timing Theory, Public Debt Offerings and Capital Structure

K. Halil

Review of Business and Economic Literature, 2011, vol. 56, issue 1, 30-52

Abstract: The Market Timing theory of capital structure states that firms that go to the financial markets at the right time can permanently lower their debt ratios. For equity markets, Baker and Wurgler (2002) show that low leverage firms are those that had raised funds when their market valuations (i.e. share prices) were high. In this study, I test this theory using a sample of U.S. public debt offerings. I find that firms do not time their public debt offerings. In fact, on average, firms tend to borrow more in periods of high interest rates. I also find that, in the long-run, the debt ratios of firms that had borrowed when interest rates are low are similar to the debt ratios of other firms. On the other hand, the results support the Tradeoff Theory: on average, public debt issuers tend to move towards their pre-issue debt levels.

Date: 2011
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Handle: RePEc:sen:rebelj:v:56:i:1:y:2011:p:30-52