Which version of the equity market timing affects capital structure, perceived mispricing or adverse selection?

Description:

Baker and Wurgler (2002) define a new theory of capital structure. In this theory capital structure evolves as the cumulative outcome of past attempts to time the equity market. Baker and Wurgler extend market timing theory to long-term capital structure, but their results do not clearly distinguish between the two versions of market timing: perceived mispricing and adverse selection. The main purpose of this dissertation is to empirically identify the relative importance of these two explanations. First, I retest Baker and Wurgler's theory by using insider trading as an alternative to market-to-book ratio to measure equity market timing. I also formally test the adverse selection model of the equity market timing: first by using post-issuance performance, and then by using three measures of adverse selection. The first two measures use estimates of adverse information costs based on the bid and ask prices, and the third measure is based on the close-to-offer returns. Based on received theory, a dynamic adverse selection model implies that higher adverse information costs lead to higher leverage. On the other hand, a naïve adverse selection model implies that negative inside information leads to lower leverage. The results are consistent with the equity market timing theory of capital structure. The results also indicate that a naïve, as opposed to a dynamic, adverse selection model seems to be the best explanation as to why managers time equity issues.

Creator(s): Chazi, Abdelaziz
Creation Date: August 2004
Partner(s):
UNT Libraries
Collection(s):
UNT Theses and Dissertations
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Publisher Info:
Publisher Name: University of North Texas
Place of Publication: Denton, Texas
Date(s):
  • Creation: August 2004
  • Digitized: November 19, 2007
Description:

Baker and Wurgler (2002) define a new theory of capital structure. In this theory capital structure evolves as the cumulative outcome of past attempts to time the equity market. Baker and Wurgler extend market timing theory to long-term capital structure, but their results do not clearly distinguish between the two versions of market timing: perceived mispricing and adverse selection. The main purpose of this dissertation is to empirically identify the relative importance of these two explanations. First, I retest Baker and Wurgler's theory by using insider trading as an alternative to market-to-book ratio to measure equity market timing. I also formally test the adverse selection model of the equity market timing: first by using post-issuance performance, and then by using three measures of adverse selection. The first two measures use estimates of adverse information costs based on the bid and ask prices, and the third measure is based on the close-to-offer returns. Based on received theory, a dynamic adverse selection model implies that higher adverse information costs lead to higher leverage. On the other hand, a naïve adverse selection model implies that negative inside information leads to lower leverage. The results are consistent with the equity market timing theory of capital structure. The results also indicate that a naïve, as opposed to a dynamic, adverse selection model seems to be the best explanation as to why managers time equity issues.

Degree:
Level: Doctoral
Discipline: Finance
Language(s):
Subject(s):
Keyword(s): capital structure | market timing
Contributor(s):
Partner:
UNT Libraries
Collection:
UNT Theses and Dissertations
Identifier:
  • OCLC: 56722619 |
  • ARK: ark:/67531/metadc4633
Resource Type: Thesis or Dissertation
Format: Text
Rights:
Access: Public
License: Copyright
Holder: Chazi, Abdelaziz
Statement: Copyright is held by the author, unless otherwise noted. All rights reserved.