Market Timing and Capital Structure

  • Author(s): Malcolm Baker, Jeffrey Wurgler
  • Published: Dec 17, 2002
  • Pages: 1-32
  • DOI: 10.1111/1540-6261.00414

It is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity when their market values are low. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.

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