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What Drives Security Issuance Decisions: Market Timing, Pecking Order, or Both?
Author(s) -
Dong Ming,
Loncarski Igor,
Horst Jenke ter,
Veld Chris
Publication year - 2012
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2012.01213.x
Subject(s) - pecking order , market timing , equity (law) , debt , monetary economics , business , pecking order theory , issuer , order (exchange) , finance , capital structure , economics , financial system , initial public offering , evolutionary biology , political science , law , biology
We study market timing and pecking order in a sample of debt and equity issues and share repurchases of Canadian firms from 1998 to 2007. We find that only when firms are not financially constrained is there evidence that firms issue (repurchase) equity when their shares are overvalued (undervalued) and evidence that overvalued issuers earn lower postannouncement long‐run returns. Similarly, we find that only when firms are not overvalued do they prefer debt to equity financing. These findings highlight an interaction between market timing and pecking order effects.