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Market timing and the debt–equity choice |
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| Authors: | William B Elliott Johanna Koëter-Kant Richard S Warr |
| Institution: | aDepartment of Economics and Finance, University of Texas at El Paso, El Paso, TX 79968, USA;bFaculty of Economics and Business Administration, Vrije Universiteit Amsterdam, Amsterdam, The Netherlands;cCollege of Management, North Carolina State University, Raleigh, NC 27695, USA |
| 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 |
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