A broader test of market timing theory of capital structure

This dissertation attempts to answer these three main questions: (1) Is there evidence of market timing by corporations in equity, public debt, private placement, 144a, and syndicated bank loan markets? (2) Does market timing in each of these markets have a persistent impact on issuing firms’ capital structures? (3) What are the factors that affect a firm’s decision to use a specific type of financing?

I find evidence of market timing in IPO, SEO, public debt, private placement/144a, and syndicated bank loan markets. I find that hot-market IPO and SEO firms issue substantially more equity than cold-market firms do. In all three debt markets, firms incorporate the observed changes in the interest rates into their decisions on how much to borrow from the creditors. However, firms do not incorporate or are not able to incorporate their predictions for future rates into their decisions on how much to borrow. In public debt and syndicated bank loan markets, firms use both the observed changes in interest rates and their predictions for the future rates as their main criteria for their maturity choice. However, for private placements and 144a issues, they use only the observed changes in interest rates as their main criteria for maturity choice.

Although market conditions have an impact on the amount of financing and the maturity of debt financing, I find that they do not have an impact on a firm's choice between equity and public debt, public debt and private debt, and private debt and syndicated bank loan financing. On the other hand, equity market timing is a determinant of a firm's choice between equity and private debt financing, and syndicated loan market timing is a significant predictor of a firm's choice between public debt and syndicated loan financing.

There is no evidence of a persistent impact of market timing in equity, public debt, private placement/144a, and syndicated bank loan markets. The results for the equity markets are consistent with the previous studies.