External financing: Market timing or managerial optimism

Review of Finance, 2013

We evaluate US firms' leverage determinants by studying how firms paid for 2,073 very large investments between 1989 and 2006. This approach complements existing empirical work on capital structure, which typically estimates regression models of leverage for a broad set of firms. Because large investments are mostly externally financed, security issuances should provide information about managers' attitudes toward leverage. We find that issued securities move firms toward target debt ratios. Firms also tend to issue more equity following a share price run-up, consistent with both the tradeoff hypothesis and managerial efforts to time market sentiment. We find little support for the standard pecking order hypothesis.

Journal of Banking & Finance, 2001

We study incremental capital structure decisions of Dutch companies. From 1977 to 1996 these companies have made 110 issues of public and private seasoned equity and 137 public issues of straight debt. Managers of Dutch companies are entrenched. For this reason a discrepancy exists between managerial decisions and shareholder reactions. Confirming Zwiebel (1996) we find that Dutch managers avoid the disciplining role of debt allowing them to overinvest. However, the market reactions show that this overinvestment behavior is recognized. Our findings also confirm the signalling model of and the static trade-off model. We do not find a confirmation of the adverse selection model of . This is probably due to the entrenchment of managers and the prevalence of rights issues.

2017

Different approaches have been used to test capital structure theories empirically. In this paper the statement that Myers and Majluf (1984) discussed, that a low risk debt issue should affect the firm value less than a high risk equity issue, is explored and tested by applying an event study approach similar to the one Eckbo (1986) carried out on different kinds of debt issuances. There are also some important assumptions are tested for comparable reasons. A sample of all firms on the NYSE from the period January, 1 in 2007 to December, 31 in 2012 is used. The findings are that the Pecking Order Theory holds rather well when looking at a two-day event window from issuance announcements of debt and equity. The Traditional Trade-off Theory also holds, but only under the fairly rough assumption that specific firms have very different capital structure value adding-optima. Interestingly, it is found that the market reaction effect of an announcement is delayed by one day and only visible on the day after the announcement.

International Research Journal of Management Science, 2017

This survey examines the extent financial executives use the assumptions and/or inputs of capital structure models generated by academicians in making corporate financing decisions. To gather the views, opinions and perceptions of financial managers regarding corporate capital structure practices a questionnaire survey was conducted. The primary data are used in this study, generated through field study based on questionnaire that obtained from the respondents. One hundred and fifty questionnaires were distributed and eighty six of which were collected and analyzed. Nepalese executives believe that excessive use of debt will increase the cost of fund in its capital structure and they also believe that capital structure evolve as the cumulative outcome of past attempt to time the equity market. Similarly, eighty one per cent of the respondents believe that EFWAMB ratio is one of the important predictive variables of the capital structure choice.

Journal of Financial Economics, 2004

We examine whether market and operating performance affect corporate financing behavior because they are related to target leverage. Our focus on firms that issue both debt and equity enhances our ability to draw inferences. Consistent with dynamic tradeoff theories, dual issuers offset the deviation from the target resulting from accumulation of earnings and losses. Our results also imply that high market-to-book firms have low target debt ratios. On the other hand, consistent with market timing, high stock returns increase the probability of equity issuance, but have no effect on target leverage.

The Financial Review, 1997

This paper reports the findings of a 1990 survey of a sample of NYSE firms conducted to learn about the managerial opinions and practices with respect to longterm financing decisions. Relying on a hierarchy of financing sources is discovered to be a far more common practice among the sample firms than maintaining a target capital structure. The risk-return dimensions of the investment being financed are found to be the most important inputs in determining financing decisions. In spite of the perceived lack of fairness in the market pricing of their securities, the sample firms do not report making financing decisions to signal a need for reevaluation of their securities. Financial managers display a much greater flexibility with capital structure decisions than with either dividend policy decisions or investment decisions. The firms which attempt to maintain target capital structures are found to perceive the average debt ratios in their respective industries to be important determinants of their own debt ratios. The firms which follow financing hierarchies on the other hand, are found to view their firms' past profits and past growth to be important determinants of their debt ratios.

This study investigates how the timing behavior and the adjustment towards the target of capital structure interact in the capital structure decisions. Past literature finds that both timing and targeting are significant in determining the leverage ratio which is inconsistent with any standalone framework. This study argues that the coexistence of both timing and targeting is possible. The preference of the firm for timing behavior or targeting behavior depends on the cost of deviation from the target. Since the cost of deviation from the target is likely to be asymmetric between overleveraged and underleveraged firms, the direction of the deviation from the target leverage is expected to alter the preference toward timing or targeting in the capital structure decision. Using GMM-system estimators with the Malaysian data for the period of 1992-2009, this study finds that Malaysian firms, on average, adjust their leverage at a slow speed of 12.7% annually increased to 14.2% when the timing variable is accounted for. Moreover, the speed of adjustment is found to be significantly higher and the timing role is lower for overleveraged firms compared with underleveraged firms. Overleveraged firms seem to find less flexibility to time the market as more pressure is exerted on them to return to the target regardless the timing opportunities because of the higher costs of deviation from the target leverage. Underleveraged firms place lower priority to rebalance toward the target compared with overleveraged firms as the costs of being underleveraged is lower and hence, they have more flexibility to time the market. The findings of this study support that tradeoff theory and timing theory are not mutually exclusive. Firms consider both targeting and timing in their financing decisions but the preference of one motive over the other is conditional on the cost of the deviation from the target.

Iranian Journal of Finance (IJFIFSA), 2023

Making decisions regarding capital structure is among the most challenging issues ahead for firms and the most critical decisions for their survival. On the other hand, several significant aspects, such as behavioral factors, have been overlooked in this field. Thus, the present study mainly seeks to identify the factors affecting capital structure in Iranian firms, emphasizing the role of behavioral factors. The present study employs mixed qualitative and quantitative research methods. From the qualitative point of view, capital market experts were inquired, and theoretical saturation was achieved using the snowball method. After the interviews, research components were extracted through coding. The opinions of a group of experts and managers of firms listed on the Tehran Stock Exchange were used in the quantitative section, and a structural equation form was used to perform confirmatory factor analysis on the research model. A total of 63 concepts in the form of six categories were identified at the first stage, which was reduced to 58 in the form of six categories and was confirmed after the concepts were sent back to the experts. The principal components included behavioral factors, macroeconomic factors, political factors, socio-cultural factors, firm features, and corporate governance. Results were validated through factor analysis in the quantitative portion of the study. The present study can be considered among the comprehensive studies at the construct level with an integrated approach to firms' capital structure. The emergence of behavioral finance resulted from understanding the importance of measuring human behavior as a factor with transcendent consequences for financial decisions. Hence, most behavioral finance studies are focused on observable behaviors. However, the item response theory presents an integrated method for disciplines that work with cognitive variables. Accepting opportunities for new knowledge is essential for firm decisions to respond to the mental views of financial managers. The present study sought to identify the factors influencing firms' capital structure in Iran. The tool used in the present study reflected the elements making up the capital structure. In this regard, the notable point is how the classic criterion of structural capital components can explain financial managers' perception of decision-making. The research results in this area are interesting since we have confirmed a capital structure theory at the construct level. The conformity of the results and the obtained reliability levels indicate that this theory fits the given dimensions well. Moreover, relevant evidence indicates that senior financial managers adopt various states considering internal and external factors at the structural level, which can cause cognitive bias in decision-making.

2003

Tests of the static trade-off theory that posits that firms move towards the optimum capital structure necessitate a joint hypothesis test-whether firms adjust toward target leverage, and whether the proxy used for target leverage is the true target leverage. Prior studies use the timeseries mean leverage for each firm, the industry median leverage, an estimated cross-sectional leverage, and a tobit estimated leverage using the factors suggested by the static trade-off theory as proxies for the target leverage. In this dissertation, I examine whether these proxies are equivalent and test the consistency of the proxies with the theorized behavior of the true target leverage. My results indicate that the four proxies we examine have significantly different distributions and this h olds across most industries. Further, the industry median leverage is the proxy which best exhibits behavior consistent with the true target leverage. Firm value is higher for firms closer to the industry median and lower for firms away from the industry m edian. A robustness check using K-means cluster analysis confirms the superiority of the industry median leverage over the other proxies of target leverage. This study complements the previous studies on the pecking order theory and the trade-off theory. The main purpose of this study is to investigate three issues that are not considered in the previous studies. The adequacy of the specification and the assumptions of the models used in testing the trade-off and the pecking order theory. The second issue examined in this study is the validity to putting the pecking order and the trade-off theories in a horse race. The final issue examined in this study is the factors driving firms to issue (repurchase) debt or equity or combination of both and simultaneously the factors affecting the size of issue (repurchase)

Journal of Policy and Development Studies, 2015

Capital structure decision poses a lot of challenges to firms. Determining an appropriate mix of equity and debt is one of the most strategic decisions public interest entities are confronted with. A wrong financing decision has the tendency of stalling the fortunes of any business. Therefore, if managers are to achieve the goal of wealth maximization, conscious steps must be taken in the right direction and at the right time to identify those factors that must be taken into cognizance in determining appropriate financing mix. It is upon this premise that this conceptual piece is designed to guide the top echelons of corporate managers in capital structure decisions. The paper explores a vast body of literature in articulating critical issues in capital structure decision.