Market Timing and Capital Structure
American Finance Association
Market Timing and Capital Structure
Author(s): Malcolm Baker and Jeffrey Wurgler
Source: The Journal of Finance, Vol. 57, No. 1 (Feb., 2002), pp. 1-32
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/2697832 .
Accessed: 08/09/2013 22:22
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp .
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
.
Wiley and American Finance Association are collaborating with JSTOR to digitize, preserve and extend access to The Journal of Finance.
http://www.jstor.org
This content downloaded from 137.189.74.205 on Sun, 8 Sep 2013 22:22:36 PM
All use subject to JSTOR Terms and Conditions
THE JOURNAL OF FINANCE * VOL. LVII, NO. 1 * FEB. 2002
Market Timing and Capital Structure
MALCOLMBAKER and JEFFREY WURGLER"
ABSTRACT
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.
FINANCE,"equity market timing" refers to the practice of issuing
IN CORPORATE
shares at high prices and repurchasing at low prices. The intention is to exploit temporary fluctuations in the cost of equity relative to the cost
Market Timing and Capital Structure
Author(s): Malcolm Baker and Jeffrey Wurgler
Source: The Journal of Finance, Vol. 57, No. 1 (Feb., 2002), pp. 1-32
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/2697832 .
Accessed: 08/09/2013 22:22
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp .
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
.
Wiley and American Finance Association are collaborating with JSTOR to digitize, preserve and extend access to The Journal of Finance.
http://www.jstor.org
This content downloaded from 137.189.74.205 on Sun, 8 Sep 2013 22:22:36 PM
All use subject to JSTOR Terms and Conditions
THE JOURNAL OF FINANCE * VOL. LVII, NO. 1 * FEB. 2002
Market Timing and Capital Structure
MALCOLMBAKER and JEFFREY WURGLER"
ABSTRACT
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.
FINANCE,"equity market timing" refers to the practice of issuing
IN CORPORATE
shares at high prices and repurchasing at low prices. The intention is to exploit temporary fluctuations in the cost of equity relative to the cost
References: Asquith, Paul, and David W. Mullins, 1986, Equity issues and offering dilution, Journal of Financial Economics 15, 61-89. Baker, Malcolm, and Jeffrey Wurgler, 2000, The equity share in new issues and aggregate stock returns, Journal of Finance 55, 2219-2257. Barclay, Michael J., Clifford W. Smith, Jr., and Ross L. Watts, 1995, The determinants of corporate leverage and dividend policies, Journal of Applied Corporate Finance 7, 4-19. Bayless, Mark, and Susan Chaplinsky, 1996, Is there a window of opportunity for seasoned equity issuance? Journal of Finance 51, 253-278. Brav, Alon, and Paul A. Gompers, 1997, Myth or reality? The long-run underperformance of initial public offerings: Evidence from venture capital and nonventure capital-backed companies, Journal of Finance 52, 1791-1822. Choe, Hyuk, Ronald Masulis, and Vik Nanda, 1993, Common stock offerings across the business cycle: Theory and evidence, Journal of Empirical Finance 1, 1-31. DeAngelo, Harry, and Ronald Masulis, 1980, Optimal capital structure under corporate and personal taxation, Journal of Financial Economics 8, 3-29. Denis, David J., and Atulya Sarin, 2001, Is the market surprised by poor earnings realizations following seasoned equity offerings? Journal of Financial and Quantitative Analysis 36, Eckbo, B. Espen, Ronald A. Masulis, and Oyvind Norli, 2000, Seasoned public offerings: Resolution of the "new issues puzzle," Journal of Financial Economics 56, 251-292. Fama, Eugene F., 1998, Market efficiency, long-term returns, and behavioral finance, Journal of Financial Economics 49, 283-306. Fama, Eugene F., and Merton H. Miller, 1972, The Theory of Finance (Holt, Rinehart and Winston, New York). Fama, Eugene F., and Kenneth R. French, 2000, Testing tradeoff and pecking order predictions about dividends and debt, Working paper, University of Chicago. Frankel, Richard, and Charles M. C. Lee, 1998, Accounting valuation, market expectation, and cross-sectional stock returns, Journal of Accounting & Economics 25, 283-319. Graham, John R., and Campbell R. Harvey, 2001, The theory and practice of corporate finance: Evidence from the field, Journal of Financial Economics 60, 187-243. Graham, John R., Michael L. Lemmon, and James S. Schallheim, 1998, Debt, leases, taxes, and the endogeneity of corporate tax status, Journal of Finance 53, 131-162. Harris, Milton, and Arthur Raviv, 1991, The theory of capital structure, Journal of Finance 39, 127-145. Helwege, Jean, and Nellie Liang, 1996, Is there a pecking order? Evidence from a panel of IPO firms, Journal of Financial Economics 40, 429-458. Hovakimian, Armen, Tim Opler, and Sheridan Titman, 2001, The debt-equity choice, Journal of Financial and Quantitative Analysis 36, 1-24. Ikenberry, David, Josef Lakonishok, and Theo Vermaelen, 1995, Market underreaction to open market share repurchases, Journal of Financial Economics 39, 181-208. Jegadeesh, Narasimhan, 2000, Long-term performance of seasoned equity offerings: Benchmark errors and biases in expectations, Financial Management 9, 5-30. Jensen, Michael C., 1986, Agency costs of free-cash-flow, corporate finance, and takeovers, American Economic Review 76, 323-329. Jensen, Michael, and William Meckling, 1976, Theory of the firm: Managerial behavior, agency costs and ownership structure, Journal of Financial Economics 3, 305-360. Jung, Kooyul, Yong Cheol Kim, and Rene M. Stulz, 1996, Timing, investment opportunities, managerial discretion, and the security issue decision, Journal of Financial Economics 42, Korajczyk, Robert, Deborah Lucas, and Robert McDonald, 1991, The effects of information releases on the pricing and timing of equity issues, Review of Financial Studies 4, 685-708. Korajczyk, Robert, Deborah Lucas, and Robert McDonald, 1992, Equity issues with timevarying asymmetric information, Journal of Financial & Quantitative Analysis 27, 397-417. La Porta, Rafael, 1996, Expectations and the cross section of stock returns, Journal of Finance 51, 1715-1742. La Porta, Rafael, Josef Lakonishok, Andrei Shleifer, and Robert Vishny, 1997, Good news for value stocks: Further evidence on market efficiency, Journal of Finance 52, 859-874. Loughran, Tim, and Jay Ritter, 1995, The new issues puzzle, Journal of Finance 50, 23-51. Loughran, Tim, and Jay Ritter, 1997, The operating performance of firms conducting seasoned equity offerings, Journal of Finance 52, 1823-1850. Loughran, Tim, Jay Ritter, and Kristian Rydqvist, 1994, Initial public offerings: International insights, Pacific-Basin Finance Journal 2, 165-199. Lucas, Deborah, and Robert MacDonald, 1990, Equity issues and stock price dynamics, Journal of Finance 45, 1019-1043. Marsh, Paul, 1982, The choice between equity and debt: An empirical study, Journal of Finance 37, 121-144. Miller, Merton H., and Myron S. Scholes, 1978, Dividends and taxes, Journal of Financial Economics 6, 333-364. Modigliani, Franco, and Merton H. Miller, 1958, The cost of capital, corporation finance, and the theory of investment, American Economic Review 48, 655-669. Modigliani, Franco, and Merton H. Miller, 1963, Corporate income taxes and the cost of capital: A correction, American Economic Review 53, 433-443. Myers, Stewart C., 1977, Determinants of corporate borrowing, Journal of Financial Economics 5, 147-175. Myers, Stewart C., 1984, The capital structure puzzle, Journal of Finance 39, 575-592. Myers, Stewart C., and Nicholas S. Majluf, 1984, Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics Pagano, Marco, Fabio Panetta, and Luigi Zingales, 1998, Why do companies go public? An empirical analysis, Journal of Finance 53, 27-64. Rajan, Raghuram G., and Henri Servaes, 1997, Analyst following of initial public offerings, Journal of Finance 52, 507-529. Rajan, Raghuram G., and Luigi Zingales, 1995, What do we know about capital structure? Some evidence from international data, Journal of Finance 50, 1421-1460. Ritter, Jay, 1991, The long-run performance of initial public offerings, Journal of Finance 42, 365-394. Shleifer, Andrei, 2000, Inefficient Markets: An Introduction to Behavioral Finance (Oxford University Press, Oxford). Smith, Clifford W., and Ross L. Watts, 1992, The investment opportunity set and corporate financing, dividend, and compensation policies, Journal of Financial Economics 32, 263-292. Speiss, D. Katherine, and John Affleck-Graves, 1995, Underperformance in long-run stock returns following seasoned equity offerings, Journal of Financial Economics 38, 243-267. Stein, Jeremy C., 1996, Rational capital budgeting in an irrational world, Journal of Business 69, 429-455. Stigler, George J., 1964, Public regulation of the securities markets, Journal of Business 37, 117-142. Taggart, Robert A., 1977, A model of corporate financing decisions, Journal of Finance 32, 1467-1484.