Market Timing Theory Research Articles

Initial Public Offering (IPO) and Value Aggregation: a Systematic Literature Review

Objective: The objective of this study is to conduct a systematic literature review on Initial Public Offerings (IPO) and value aggregation, identifying the key articles and authors who investigate the topic. Theoretical Framework: The theoretical framework is based on life cycle, market timing, and pecking order theories, highlighting the benefits and risks of IPOs for companies, such as raising capital and increasing market value. Method: The method used was a systematic review, based on the Web of Science, focusing on articles about IPOs and value creation. Stages such as research operationalization, application of filters, and bibliometric analysis were followed. Results and Discussions: The results indicate a significant increase in the number of publications after 2007, with emphasis on the seminal work of Loughran and Ritter. The discussions reveal that most research focuses on pricing and governance aspects, with few investigations on financial value aggregation. Research Implications: The research implications suggest the need for future studies focusing on the financial impact of IPOs, especially in emerging markets. Originality/Value: The originality and value of this work lie in the systematization of a vast literature on IPOs and the identification of gaps for future research

Targeting behavior and capital structure theories: An empirical analysis of gulf cooperation council countries

This study examined the dynamic nature of capital structure decisions and the effectiveness of trade-off, pecking order, and market timing theories in explaining the changes in leverage ratios. A partial adjustment model was used to examine the practice of setting a target (optimal) leverage, estimate firms’ speeds of adjustment in reaching their target leverages, and identify the capital structure theories that best explain the changes in leverage levels of firms in the Gulf Cooperation Council countries. Firms in these countries reach their target leverages at estimated average speeds of adjustment of 59.8 %–72 % annually. These speeds of adjustment are sensitive to country- and firm-specific characteristics. The targeting behavior factor of the trade-off theory better explains the changes in capital structure compared with the pecking order or market timing theories.

FINANCIAL ANALYSIS AND VALUATION OF SELECTED UK LISTED COMPANY: A CASE STUDY

Objective: The objective of this study is to investigate the financial analysis and valuation of UK listed companies, with the aim of gaining insight into the financial performance and operational position of Hill and Smith Plc and other key players in the industry. Theoretical Framework: In this study, the main concepts and theories that underpin the research include the irrelevance theory, trade off theory, pecking order theory and market timing theory. These theories explain the underlying factors that determine the financing and valuation choices of listed firms. Method: The study adopted the net assets valuation, dividend discount model, free cashflows, earnings model, comparative companies, and comparative transactions valuation methodologies. The study adopted Hill and Smith Plc as a case study, extracting relevant data from its annual financial records. Results and Discussion: The study revealed a +4.17% abnormal return, suggesting an exceptional performance. It compared financial positions with peers like Morgan Advanced Materials and Keller Group, employing multiple valuation methods. The earnings model indicated a share price of £14.1, suggesting a potential overvaluation in the stock market at £10.0 per share. Research Implications: The practical and theoretical implications of this research are discussed, providing insights into how the results can be applied or influence practices in the field of corporate finance and valuation. These implications impact various stakeholders such as the researched firms, investors, and academia. Originality/Value: This study contributes to the literature by highlighting the valuation methodologies employed in the study, emphasisng the importance of accurate valuation techniques in informing investment decisions.

The Art of Timing: Unpacking the Market Timing's Long -Term Impact on Capital Structure : With Reference to Listed Companies in Colombo Stock Exchange

The market timing theory serves as the basis for this study, which aims to unravel the persistent reaction to capital structure decisions. The rationale for conducting this study stemmed from observing a gap in understanding the capital structure behaviour of firms surrounding their initial public offerings and the progression of debt and equity from that initial point. The study's sample, which covered the years 1992 to 2018, was created by using the IPO date of companies listed at the Colombo Stock Exchange) in Sri Lanka. To measure market timing, the study utilized a variable called external finance weighted average market-to-book ratio. This variable served as an indicator of the firms' timing decisions in relation to the capital structure. A panel regression model quantified the timing impact, showing an inverse association between variables. However, the strength of the correlation was found to be less significant than what market timing theory had predicted. Thus, it could not be proven that listed companies consistently increase their equity by issuing new shares when the current share price rises. These findings suggest that while market timing may have some influence on the determination of the debt and equity portions in capital structure decisions, other factors may also come into play. The study highlights the importance of considering additional variables and factors that can impact capital structure choices. It further emphasizes the significance of increasing equity on firm capital structures and costs, and suggests that management can potentially adjust the capital structure based on historical market-to-book ratios.

DO MARKET TIMING INCENTIVES AFFECT THE DEBT-EQUITY CHOICE OF MALAYSIAN SHARIAH-COMPLIANT IPOS?

Empirical and theoretical literature points out that market timing could shape financing decisions and persistently affect capital structure. However, prior studies on market timing do not distinguish between Shariah-compliant and non-compliant firms although Shariah compliance considerations may affect market timing incentives. This paper aims to fill this gap in the literature by investigating whether market timing theory is relevant in the case of Shariah-compliant firms. We consider panel data consisting of 40 Malaysian Shariah-compliant companies that went public during the period from 1 January 2015 to 31 December 2018. We report evidence that managers of Malaysia Shariah-compliant IPOs tend to time the market by issuing equity when they perceive that their shares are overpriced and market conditions are favorable. However, the impact of these market timing on their capital structure quickly disappears. The findings provide useful implications for investors and portfolio managers interested in investing in Shariah-compliant IPOs. They should identify market timers in order to avoid low subsequent returns of equity issuers.

Corporate investment sensitivity to equity market misvaluation

PurposeThe purpose of this paper is to investigate the effect of equity market misvaluation on manager behavior. Using a sample of 535 French-listed over 2000–2018, the authors analyze whether corporate investment decision is sensitive to equity market overvaluation.Design/methodology/approachThe study adopts market-to-book (M/B) decomposition developed by Rhodes-Kropf and Viswanathan (2004, RKV) that proxies for market misvaluation at the firm and industry levels. The authors conducted a long-term performance analysis via a portfolio sorting procedure and a Carhart (1997) four-factor pricing model. The authors tested the relationship between equity misvaluation, corporate investment decisions and equity issuance. The authors ran several robustness tests.FindingsThe empirical results show that equity market misvaluation affects corporate investment positively as the stock price deviates further away from its fundamental. Based on market timing theory, the authors find that corporate investment occurs in periods of high valuation motivated by equity issuance to benefit from the low cost of capital. This effect is more prominent for financially constrained firms. Consistent with the catering channel, the authors find that the misvaluation-investment nexus is more pronounced in firms with short-horizon investors. By examining the stocks’ long-term performance of misvalued firms, via a sorting portfolio procedure, the authors find that undervalued firms outperform and generate higher abnormal returns (Jensen’s alpha) than overvalued firms, suggesting that mispricing-driven investment appear to be short-lived and lead to lower return in the long term.Practical implicationsCorporate decision-makers and governance structures should pay attention to the rationality of the corporate investment decision in the context of equity market misvaluation. Managers who focus on maximizing the stock market value in the short-run at the expense of its long-term performance must give preference to value-creating investment, not driven by an external mechanism such as equity market mispricing. More generally, investors and portfolio managers must take into account the market mispricing process in decision-making. Nonetheless, from the portfolio sorting perspective, decision-makers must act in terms of high governance quality to mitigate suboptimal investment due to stock market mispricing (Jensen, 2005). Finally, equity market overvaluation, leading managers to invest via equity financing in particular, should be a signal to attract investors’ attention to seize the window of opportunity and embark on a short-term portfolio strategy. Such a strategy promises high returns in the short term.Originality/valueThis paper investigates jointly two theoretical channels: equity market timing and catering. The authors propose for the analysis three components of the M/B decomposition to dissociate market misvaluation at the firm and industry level from the fundamental component of market value (growth). This procedure provides a better understanding of the role of firm and industry misvaluation in explaining corporate investments. The authors provide evidence of the equity market misvaluation via a portfolio sorting procedure and a Carhart (1997) four-factor pricing model. The authors examine the effect of misvaluation on both the investment and the financing decisions.

An Empirical Investigation of Companies in an Emerging Economy of Financing Options for Non-Financial Companies in Relation to the Shareholder Value, The Case Study of Nigeria

ABSTRACT: Purpose: In order to contribute to the discussion that there are major differences in the financing alternatives accessible in developed and developing economies, this paper examines the relationship between a firm's financing options and shareholders' value in the context of emerging markets. Design/methodology/approach: This study analysed characteristics that could help determine how firms in Nigeria finance their operations and possibly generate value for shareholders by drawing on market timing theory and panel data regression estimation. For the years between 2007 and 2016, information from 87 non-financial companies listed on the Nigerian Stock Exchange was used (10 years). Findings: We discover that businesses prefer equity-based financing because it increases shareholder value. The Hausman test result showed that the fixed-effects model was adequate, and the model's outcomes also closely matched those of the panel regression estimate to firmly support our findings.

Financial Structure, Firm Size and Financial Growth of Non-Financial Firms Listed at the Nairobi Securities Exchange

A significant number of the non-financial firms listed at the Nairobi Securities Exchange (NSE) have been experiencing declining financial performance and financial growth, which deter investors from investing in such firms. Hence, the study aimed at establishing the effect of financial structure on the financial growth of non-financial firms listed at the NSE. The study was guided by the Modigliani-Miller theory, Agency Theory, Pecking Order Theory, Trade-off Theory, Market Timing Theory, and Theory of Growth of the Firm. An explanatory research design was adopted. The study’s target population comprised 45 non-financial firms listed at the NSE for a period of ten years, from 2008 to 2017. The panel model revealed that short-term debt, long-term debt, retained earnings, and share capital explain 61.36% of variations in financial growth as measured by growth in earnings per share and 65.57% of variations in financial growth as measured by growth in market capitalization. Short-term debt has a positive and significant effect on financial growth as measured by growth in earnings per share (β=0.024095, p=0.013) and growth in market capitalization (β=0.028529, p=0.006). Long-term debt has a positive and significant effect on financial growth as measured by growth in earnings per share (β=0.864088, p=0.000) and growth in market capitalization (β=0.958656, p=0.000). Retained earnings have a positive and significant effect on financial growth as measured by growth in earnings per share (β=0.951749, p=0.015) and growth in market capitalization (β=0.043784, p=0.004). Further, share capital has a positive and significant effect on financial growth as measured by growth in earnings per share (β=0.007016, p=0.000) and growth in market capitalization (β=0.09635, p=0.001). Firm size significantly intervenes in the effect of financial structure on the financial growth of non-financial firms listed at the NSE measured using growth in earnings per share. However, Firm size does not intervene in the effect of financial structure on the financial growth of non-financial firms listed at the NSE measured using growth in market capitalization. The study concludes that short-term debt, long-term debt, retained earnings, and share capital positively influence financial growth as measured by both growth in earnings per share and growth in market capitalization. The study recommends that the management of non-financial firms listed at the NSE to balance financing a firm using debt and equity. The study also recommends that the management of non-financial firms listed at NSE to encourage its shareholders to re-invest back their earnings rather than consuming them as dividends. Financial structure varies significantly depending on the sector in which a firm operates. There is a need to conduct a comparison study to establish the effect of financial structure on the financial growth of non-financial firms versus financial firms listed at the NSE. The comparison study will tell which form of financing is appropriate for non-financial firms and which one is appropriate for financial firms.

The long-run abnormal returns and the subsequent SEO characteristics of profit-exempted IPO firms in Taiwan

<p>The deregulation of IPO requirements changes the industrial structure. Focusing on Taiwan’s unique profit-exempted IPO requirements, this study confirms that deregulation not only leads to IPO clustering, but also to a concentration in chemical and bio-pharmaceutical industry. The profit-exempted IPO issuers actively release optimistic information about future growth and take advantage of overvaluation to increase IPO revenue by misleading investors into mispricing the IPO. This results in poor long-run abnormal stock returns when stock price reverses after the IPO to correct the mispricing. In addition, some profit-exempted companies continue to use mispricing to raise equity capital and issue new shares after the IPO. For profit-exempted IPO companies, the characteristics of seasoned equity offerings within three years after IPO are significantly different from other companies. They are more likely to issue shares after IPO with shorter interval, larger size, and more frequent than non-profit exempted IPO firms. This study finds that the phenomenon of profit-exempted issuers raising capital is more consistent with the market timing theory.</p> <p> </p>

How are economic policy uncertainty shocks transmitted to capital structure? Chinese evidence

PurposeThe purpose of this paper is to investigate the mechanism of transmitting economic policy uncertainty (EPU) shocks to capital structure.Design/methodology/approachThe authors adopt a novel approach that bridges the asset pricing implications of EPU and the debt-financing decisions of Chinese firms by introducing a variable “policy-risk-induced equity return” (PRER). PRER is the product of the EPU beta and the EPU shock. Differentiating firms as per the signs of the EPU beta helps to shed light on the deep questions of whether their respective leverage targets and speeds of adjustment are different and how the targets and speeds are determined.FindingsThe empirical evidence shows that it is the equity market that channels EPU shocks to capital structure through PRER in China. Firms with positive (negative) EPU betas have PRER impact negatively (positively) the leverage target, conforming to the market-timing theory. EPU and non-policy uncertainty shocks cause the speed of adjustment to change over time. Overall, the intertemporal relation between EPU and leverage is negative. These results are robust to alternative leverage measures and after controlling for non-policy uncertainty shocks and conventional firm characteristics and have implications for academic research, policymaking, market stability, and corporate financing.Originality/valueThis study is the first to probe for, and provide insights into, the underlying reason why EPU impacts capital structure by connecting asset pricing to corporate financing for a large sample of Chinese publicly traded firms.

Do the Firms Utilize Market Timing? Capital Structure of Restaurant Firms by Pecking Order and Market Timing Theories

ABSTRACT The purpose of this study is to examine whether restaurant firms prefer debt to equity financing and utilize market timing well in equity financing during firm value maximization. For this purpose, two theories were applied – pecking order and market timing. Secondary financial data was collected from restaurant firms based in the United States. Subsequently, bivariate correlation, fixed and random effects, and pooled Ordinary Least Square (OLS) analyses were performed on the statistical data. The analysis outcomes support the pecking order theory, meaning that restaurant firms rely significantly on debt over equity in financing decisions. The analysis outcomes of the market timing proxy indicate that restaurant firms either do not use market timing enough or do not have a sufficient window of opportunity (firm value maximization) for equity financing. Although the restaurant industry has a relatively higher liability ratio than other industries, its financing decisions combining debt and equity have never been examined. The theoretical and managerial implications have been suggested in terms of balancing debt and equity financing decisions and the influence of corporate governance structure on financing decisions.

The Effect Of Market Timing On Capital Structure In Non-Financial Companies That Do IPO (Initial Public Offering) on the Indonesia Stock Exchange for the 2010-2017.

Market timing theory (MTT) refers to the practice where the companies issue shares when the share prices are high prices and repurchase the shares when the share prices are low. This study aims to determine the effect of market timing on the company's capital structure and to determine whether there is a persistent (long-term) effect of market timing on the capital structure during the IPO period up to 3 years after the IPO. This study used a purposive sampling method and obtained 102 companies that conducted Initial Public Offerings on the IDX for the 2010-2017 period. The data analysis technique used is multiple linear regression analysis, while research testing is done using eviews. This study also uses four control variables, namely profitability, firm size, asset tangibility, and growth. The results of this study indicate that market timing has a significant negative effect on capital structure. However, this study also shows that market timing does not affect capital structure in the long term.

Regression Analysis of Macroeconomic Conditions and Capital Structures of Publicly Listed British Firms

Using an unbalanced panel of 922 non-financial companies publicly listed on the London Stock Exchange during January 1995 and September 2014, this article tests the predictions of Pecking Order Theory (POT), Trade-off Theory (TOT) and Market Timing Theory (MTT) of capital structure through the lens of macroeconomic conditions. We find strong evidence that leverage is negatively associated with the business cycle but positively related to stock market performance, which is consistent with POT. In addition, leverage is negatively related to financial market risk, as predicted by TOT. Furthermore, leverage is positively related to credit supply, which is in line with both the POT and TOT. Finally, there is no evidence in support of MTT. The above results are robust with respect to the measurement of macroeconomic variables, the choice of estimation methods and the inclusion of a dummy variable to account for the effect of the 2008 financial crisis. An important implication is that, because firms tend to be highly levered during business cycle downturns, expansionary fiscal and monetary policies to encourage more business borrowings may not be effective after all.

Theory of capital structure decision: Overview of the banking industry

The relevance of capital structure decision in the banking sector is documented in this paper. It contributes to existing literature in a review of previous empirical studies and fundamental theories of capital structure. The study underscored the factors influencing the choice of funding in connection with the market timing theories such as Pecking Order theory and the trade -of - theory. Our investigation suggest that, the choice of capital vary across sectors and industries on the basis of business risks, corporate governance, profitability, internal controls, and efficiency. The study observed that most empirical researchers universally endorsed asset structure, industry volatility, corporate taxes and firm growth as strong determinants of capital structure. The above issues may either improve the solvency position of a form or trigger major financial distress depending on the source of capital.

Effects of Initial Public Offering on the Value of a Company: A Case Study of Tanzania Breweries Limited Company, Dar es Salaam

This study aims to analyze effects of initial public offering on the value of a company in Tanzania using Tanzania Breweries Public Limited Company as a case study. The specific objectives of the study were to assess the influence of stock price, asset valuation and intangible assets on the value of Tanzania Breweries PLC. The study adopted explanatory research design that included time series analysis (TSA) because analysis of the past is vital for forecasting the future and employed market timing theory. The method of data collection was documentary analysis; E-views was used to analyze the data which were collected from TBL, DSE and UNCTAD from 2010 to 2020. After confirming the existence of long-term associations between variables in our model, the collected data was submitted to ordinary least square (OLS) and t-values using the vector error correlation model. Results of the study indicated that asset valuation (ASSV) had a positive but small impact on the value of the company. While the short and long-term coefficients test between intangible assets (INTA) and stock price (STKP) had a negative and minor impact on Tanzania Breweries Company’s value at 5% of critical value. It is therefore suggested that organizations should focus on developing goodwill as one of the intangible assets that attract investors and shareholders. Management as well as owners of companies should be trained on the importance of using IPO as a source of improving the equity capital rather than using debt instruments. The government should strengthen policies and loosen some regulations, particularly for foreign investors, in order to attract more direct and indirect investment.

Capital structure of non-financial companies in EU countries – macroeconomic view

Abstract This article examines the macroeconomic aspects of capital structure of companies in EU countries in the international context during the period 2011–2020. It aims at evaluating the capital structure of European non-financial companies in general, followed by the application of market timing theory and convergence tendencies in the companies within the EU countries. Our results suggest that the equity ratio of examined companies has grown over the last decade at the expense of credit sources of financing. Although our research could not confirm the possibility of market timing theory application, this was due to the limitations of our analysis caused also by an inappropriate data structure. The general result of the examination of convergence suggests that the historical capital structure has a strong impact on the current structure. Analysis of the capital structure of companies in individual European countries also shows that there are still significant differences between these countries, which have been reduced only partially in the medium term, and thus convergence trends are insignificant.

Non-linearity in Equity Market Timing: Empirical Evidence From the UK

This paper empirically tests the market timing theory to prove that issuing behavior of managers is non-linear. Consistent with the literature we show that mangers increase use of equity to finance their deficit when equities are overvalued and resort to a higher proportion of debt when equities are undervalued. Our results further suggest that mangers however exhibit a distinctive pattern when timing the market. The increase in reliance on equity to finance their deficit during periods of equity overvaluation is non-linear and only significant when the degree of overvaluation is not excessive. Furthermore, during periods of undervaluation managers resort to higher levels of leverage to finance their deficit only when undervaluation levels are excessive. This has serious implications on the ability of the equity market timing as a stand-alone theory in explaining capital structure decisions and poses some interesting implications on the debt-equity choice question when financing the deficit.

IMPACT OF COVID-19 ON WORKING CAPITAL MANAGEMENT: A THEORETICAL APPROACH

This study uses an archival technique to examine the impact of COVID-19 on working capital management. The study reviews previous research published in high-impact journals between 2000 and 2021. In addition, the study uses the risk trade-off theory, market timing theory, and cash conversion cycle theory as lenses to understand the relationship between COVID-19 and working capital management. Both theoretical and empirical reviews indicate that the impact of the COVID19 plague has weakened the finances of business organizations on a global scale. Thus, reviewed theories suggest that for the business organizations to come into the limelight of financial muscle amidst COVID-19, managers should review variable costs and work with their main partners, and access to funds that have been made available to corporate organizations as a result of the mitigation of the COVID-19 plague.

Effect of Institutional Ownership on Financial Performance in Kenya: Moderated Mediation Role of Capital Structure and Corporate Diversification

Purpose: The study aimed at examining the moderating effect of capital structure in the indirect relationship between institutional ownership and financial performance through corporate diversification of listed firms at the Nairobi securities in Kenya. Approach/Methodology/Design: Post positivist research paradigm and explanatory research design guided the study in which 35 listed firms from 2003 to 2017 were included. Findings: There was a significant interaction effect between capital structure and institutional ownership on financial performance through corporate diversification. The study extended market power theory by examining institutional ownership structure given that corporate diversification is not only a source of power to drive a firm’s performance. Practical Implications: Institutional investors provide equity capital that is collaborated with the firm’s capital structure. As a result, there exist sufficient resources to take on diversification strategy despite this translating to a smaller amount in terms of financial performance. The study had implications on Market timing theory which opines that market timing is a ‘first order determinant’ to aid in selecting a suitable form of financing given debt and equity. Ideally, the preferences of different owners in the firm would affect the choice between debt and equity financing. Originality/value: Investigation of the interaction effect between capital structure and institutional ownership on financial performance through corporate diversification.

The Impact of Capital Structure onProfitability of Manufacturing Firms on the Ghana Stock Exchange: A Conceptual Analysis

The concept of capital structure has raised considerable attention across many manufacturing sectors since the sector is influenced by many economic factors. There have been many efforts to comprehend the concept of capital structure using different theoretical perspectives. The study is grounded on a literature review that aims to assess the influence of the choice of capitalon profitability by reviewing literature extensively on capital structure theories such as trade-off theory, pecking order theory, agency theory, Modigliani & Miller, and market timing theory. To ensure a firm's profitability, firstly, the firm must be aware of its life cycle stage to determine the appropriate capital mix or structure required. Also, the company must develop a corporate financial strategy to determine the optimal mix of capital to maximize the market value of firms outstanding shares, which will lead to profitability The researcher recommends that managers of manufacturing companies should not overuse the amount of leverage in their capital structure, but rather, they must first attempt to finance their projects through retained earnings and only resort to leverage as a last resort. Managers must strive to reach and maintain the appropriate capital structure level to maximize the firm's performance. The result from the study of literature shows that increases in short term debt and long-term debt affect the manufacturing companies' performance. The implication is that managers should make sure that they identify and maintain the optimal capital structure level to maximize the company’s profit base.