Market Timing and Capital Structure

American Finance Association

Market Timing and Capital Structure
Author(s): Malcolm Baker and Jeffrey Wurgler
Source: The Journal of Finance, Vol. 57, No. 1 (Feb., 2002), pp. 1-32
Published by: Wiley for the American Finance Association
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THE JOURNAL OF FINANCE * VOL. LVII, NO. 1 * FEB. 2002

Market Timing and Capital Structure
MALCOLMBAKER and JEFFREY WURGLER"
ABSTRACT
It is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity when their market values are low. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.

FINANCE,"equity market timing" refers to the practice of issuing
IN CORPORATE

shares at high prices and repurchasing at low prices. The intention is to exploit temporary fluctuations in the cost of equity relative to the cost

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