The influence of market timing theory on company capital structure

The research on the relationship between market timing and corporate financing decision shows that companies will consider market timing factors to a great extent when choosing financing methods, and choose equity financing when the stock price is high and debt financing when the stock price is low, so as to make use of lower financing costs. If the company has no target capital structure or does not adjust the deviation of the actual capital structure from the target capital structure after issuing securities for other reasons, the financing decision based on market timing will have a long-term impact on the capital structure. Previous research shows that the adjustment speed of the company's capital structure is really slow. Shyam-Sunder and Myers (1999) and Fama and French(2002) believe that it usually takes more than five years for a company to adjust its capital structure to the target capital structure, and any financing activity will have a lasting and important impact on the company's capital structure.

Baker and Wurgler(2002), professors of Harvard University, took the lead in systematically studying the capital structure of market timing and published a paper entitled Market Timing and Capital Structure. Baker and Wurgler(2002) compiled a new proxy index of market timing-external weighted average market value book ratio (EFWAMB) to reflect the timing factor of the stock market. If the company used more external financing when its market value was relatively high in the past, its EFWAMB would have greater weight. They use three methods to test the impact of market timing on capital structure. The first method is to control the current P/B ratio, and use leverage regression model to test the influence of EFWAMB variable on capital structure. The second method is to control the initial capital structure level in the regression model and test how the subsequent market value fluctuation causes the capital structure to deviate from the initial level; The third method is to test the influence of book ratio of weighted average market value on lagging value. The research shows that the past market value of the company has a very significant impact on the capital structure economically and statistically, and this impact can last for 10 years. Traditional capital structure theory can't explain this result. They believe that the capital structure theory based on market timing can make the most reasonable explanation, which can be simply expressed as the cumulative result of the company's past choice of stock market timing. They believe that the two market timing models of stock mispricing and information dynamic asymmetry may lead to similar dynamic capital structure, and the specific influencing mechanism is as mentioned above. Their research did not distinguish between the two models, but a lot of evidence of mispricing in the stock market shows that obvious mispricing is an important motive for financiers to choose the timing of the stock market.

Huang He Ritter (2005) used the cost of equity financing to examine the influence of financing decision-making mode and various financing methods on capital structure, and re-examined the theory of market timing capital structure from a new perspective. The results show that the market timing is an important determinant of the company's choice of issuing stocks or bonds, and the impact of issuing stocks and bonds on the capital structure will last for 65,438+00 years. They subdivided the data of sample companies and found that after controlling the characteristic factors of the companies, the capital structure adjustment speed of the sample listed companies for 30 consecutive years was very slow, with the adjustment speed of the impact effect on book leverage of 9 ~ 19 per year, while the adjustment speed of the impact effect on market leverage of 9 ~1~ 25 per year. This slow adjustment speed shows that market timing has a long-term impact on the company's capital structure.

Welch (2004) studied the influence of stock price changes on the company's capital structure. He divided the factors that affect the capital structure change into the company's net issuance activities and stock returns, and found that within 1 ~ 5 years, stock returns can explain 40% of the capital structure change, and securities issuance activities can explain 60% of the capital structure change, while issuing securities is not used to make up for the capital structure change caused by the change of equity value caused by the change of stock returns. This shows that when the stock market mispricing leads to the change of stock returns, the change of stock returns will affect the company's capital structure, thus supporting the market timing model of stock mispricing.

Chang et al. (2006) used the same method as Baker and Wurgler(2002) to study the market timing model of Japanese companies, and the results showed that the external weighted average price-to-book ratio (EFWAMB) was negatively correlated with the leverage ratio. He also divided EFWAMB into KTMB and KTCOV according to the method of Kayhan and Titman (2006), representing the growth opportunities of the company, and KT-COV representing the market timing factor). After controlling the growth opportunity factor of the company, KTCOV is negatively related to the leverage ratio both economically and statistically. Further analysis shows that the change of capital structure is negatively correlated with the previous stock returns. All these indicate that the capital structure of Japanese companies has obvious market timing effect. Bie and Haan(2004) used the same method to verify the theory of market timing capital structure with Dutch companies as samples. The results show that the choice of financing methods of Dutch companies is influenced by market timing, which has a significant impact on capital structure in the short term, but no evidence of long-term impact is found. Liu Duan et al. (2006) also studied the persistence of market timing on the capital structure of listed companies in China proposed by Baker and Wurgler(2002), and found that companies with high stock market prices are willing to choose equity financing in the short term; Moreover, the past market price information will also have a long-term impact on the capital structure, which will continue to accumulate for a certain period of time and last for about five years. Various capital market studies show that the market timing effect does exist and will have a substantial impact on the company's capital structure, thus confirming the rationality of the market timing capital structure theory.