Equity Supply and Equity Market Timing on Capital Structure

Abstract

We find that the changes to individual securities accounts, which denote an equity supply condition variable, is a new and effective equity market timing measure in China. This timing measure can avoid previous criticisms of timing measure for not being independent of firm characteristics of capital structure. Regarding the debate about whether equity market timing has a persistent effect on capital structure, our empirical results show that there are more than 7 years of a persistent effect of equity market timing on firm leverage, thus supporting the equity market timing theory. Moreover, we offer evidence that the persistent timing effect on capital structure is driven by the market conditions of equity supply and equity supply conditions play an important role in corporate financial decisions.