Capital Structure and Market Timing in the UK: Deviation from Target Leverage and Security Issue Choice

Abstract

This paper examines the timing behaviour of firms in the UK. We estimate intrinsic value of firms’ equities and find that managers do indeed time security issue which leads them to deviate away from target leverage levels. We further find that equity mispricing influences issue decisions as well as the issue choice. Equity mispricing increases the likelihood of firms making security issues. In addition, undervaluation increases the probability of firms opting for debt issues instead of equity. Firms also reduce equity and debt levels to reflect equity mispricing indicating that repurchase decisions are also timed. In addition, we find that firms are more likely to issue debt accompanied with equity repurchases due to equity undervaluation and equity issues are supplemented with debt repurchases due to equity overvaluation.