Market Timing and Capital Structure for Baker and Wurgler

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. Introduction â€Å"Equity market timing† refers to the practice of issuing shares at high prices and repurchasing shares at low prices. Equity market timing appears to be an important aspect of real corporate financial policy. In this paper, B&W ask how equity market timing effects capital structure and whether it has a short-run or long-run impact. The variation in market-to-book ratio is a proxy for manager’s perceptions of misevaluation. The main finding is that low leverage firms are those that raised funds when their market valuations were high (measured by the book-to-market ratio), while high leverage firms are those that raised funds when their market valuations were low. The influence of past market valuations in capital structure is economically significant and statistically robust. The influence of past market valuations on capital structure is also quite persistent, this means that they have a long-run impact. The tradeoff theory predicts that temporary fluctuations in the market-to-book ratio or any other variable should have temporary effects. The evidence however indicates long-term effects as well. The standard pecking-order theory implies that periods of high investment will push leverage higher toward a debt capacity, not lower as the results in this paper suggest. The theory of entrenched managers suggests that managers exploit existing investors ex post by not rebalancing the capital structure with debt, this may be an explanation of the findings in this paper. 1. Capital structure and past market valuations Individual financing decisions depend on market-to-book ratios. Does market-to-book affects capital structure through net equity issues as market timing implies? And does market-to-book has persistent effects that help to explain the cross section of leverage? Data and summary statistics. Table I shows that book leverage decreases sharply following the IPO. Over the next 10 years, it rises slightly, while market value leverage rises more strongly. The book leverage trend is an age effect, not a survival effect. Most notable is the sharp switch to debt finance in the year following in the IPO. Under B&W’s definitions for financing activity, the change in assets is equal to the sum of net debt issues, net equity issues, and newly retained earnings. The concurrent increase in equity issues is suggestive of market timing. Determinants of annual changes in leverage B&W document the net effect of market-to-book on the annual change in leverage. Then they decompose the change in leverage to examine whether the effects comes through net equity issues, as market timing implies. Three control variables are used that have been found to be correlated to leverage: Asset tangibility, profitability, and firm size. B&W regress each component (equity issues, debt issues, and newly retained earnings) of changes in leverage on the market-to-book ratio and other independent variables. This allows them to determine whether market-to-book affects leverage through net equity issues, as market timing implies. The effect of market-to-book on changes in leverage does indeed come through equity issues. Panel C shows that market-to-book is not strongly related to retained earnings, ruling out the possibility that market-to-book affects leverage because it forecasts earnings. The effect of profitability on changes in leverage arises primarily because of retained earnings. Firm size plays an important role at the time of the IPO. Determinants of leverage. If managers do not rebalance to some target leverage ratio, market timing may have persistent effects, and historical valuations will help to explain why leverage ratios differ. The relevant historical variation in market valuations is measured by the â€Å"external finance weighted-average† market-to-book ratio. This variable takes high values for firms that raised external finance when the market-to-book ratio was high and vice-versa. The intuitive motivation for this weighting scheme is that external financing events represent practical opportunities to change leverage. It therefore gives more weight to valuations that prevailed when significant external financing decisions were being made, whether those decisions ultimately went toward debt or equity. This weighted average is better than a set of lagged market-to-book ratios because it picks out, for each firm, precisely which lags (intervals) are likely to be the most relevant. Intuitively the weights correspond to times when capital structure was most likely to be changed. When firms go public, their capital structure reflects a number of factors, including market-to-book, asset tangibility, size, and research and development intensity. As firms age, the cross-section of leverage is more and more explained by past financing opportunities, as determined by the market-to-book ratio, and past opportunities to accumulate retained earnings, as determined by profitability. Historical within-firm variation in market-to-book, not current cross-firm variation, is more important in explaining the cross section of leverage. The results from Table III and IV show that the effect of historical valuations on leverage is large and separate from various effects documented in prior literature. Persistence So far two main results have been documented. First, high market valuations reduce leverage in the short run. Second, historically high market valuations are associated with lower leverage in the cross section. By measuring changes from the leverage prevailing in the year before the IPO, the dependent variable includes the effect of the IPO itself. This is useful because the IPO is a critical financing event known to be connected to market value. Historical market valuations have large and very persistent effects on capital structure. This effect is independent of various control variables. 2. Discussion Tradeoff theory In perfect and efficient markets capital structure is irrelevant. Some of the imperfections that lead to an optimal tradeoff are as follows: Higher taxes on dividends indicate more debt, higher non-debt tax shields indicate less debt, higher costs of financial distress indicate more equity, agency problems can call for more or less debt. The market-to-book ratio can be connected to several elements of the tradeoff theory but it is most commonly attached to costly financial distress. The key testable prediction of the tradeoff theory is that capital structure eventually adjusts to changes in the market-to-book ratio. However, evidence indicated that variation in the market-to-book ratio has a decades-long impact on capital structure. B&W’s results make the point that a considerable fraction of cross-sectional variation in leverage has nothing to do with an optimal leverage ratio. Pecking order theory In the pecking order theory there is no optimal capital structure. The static model predicts that managers will follow a pecking-order (internal, debt, equity). The pecking order theory regards the market-to-book ratio as a measure of investment opportunities. Periods of high investment opportunities will tend to push leverage higher toward a debt capacity. However, to the extent that high past market-to-book actually coincides with high past investments, B&W’s results suggest that such periods tend to push leverage lower. The dynamic version predicts a relationship between leverage and future investment opportunities. B&W’s results control for current market-to-book and show that leverage is much more strongly determined by past values of market-to-book. Managerial entrenchment theory High valuations and good investment opportunities facilitate equity finance, but at the same time allow managers to become entrenched. They may then refuse to raise debt to rebalance in later periods. Market timing theory Capital structure evolves as the cumulative outcome of past attempts to time the equity market. There are two versions of equity market timing. The first is a dynamic form with rational managers and investors and adverse selection costs that vary across firms or across time. Temporary fluctuations in the market-to-book ratio measure variations in adverse selection (information asymmetry). The second version of equity market timing involves irrational investors or managers and time-varying mispricing. If managers try to exploit too-extreme expectations, net equity issues will be positively related to market-to-book. The critical assumption is that markets need not be inefficient, managers may simply believe that they can time the market. 3. Conclusion A variety of evidence suggests that equity market timing is an important aspect of real financial policy. This evidence comes from analyses of actual financing decisions, analyses of long-run returns following equity issues and repurchases, analyses of realized and forecast earnings around equity issues, and surveys of managers. We find that fluctuations in market valuations have large effects on capital structure that persist for at least a decade. The most realistic explanation for the results is that capital structure is largely the cumulative outcome of past attempts to time the equity market.

Effects of CClF3 on Ozone

CC13F to enter the stratosphere (1930 to 1955). 2. The ozone layer above Canada began to decline in 1975. 3. Once the production of CC13F was drastically reduced, it took 20 years for the CC13F levels to decrease in the stratosphere. Conclude and Communicate 4. CFCs (Chlorofluorocarbons) are inorganic man-made chemicals that have been in production for more than 50 years in Canada.They were thought to be sensational substances due to their stability, nonflammable characteristic, low in toxicity, and inexpensive. However, research on CFCs showed that they have long life spans allowing them to resist being washed away in rain. Through the aid of wind, CFCs rise up into the stratosphere and into the ozone layer where they decompose into chlorine and bromine, from the ultraviolet radiation. These two chemicals are responsible for damaging the ozone layer.Some atmospheric chlorine are caused by natural occurrences such as large fires and volcanic eruptions, yet most chlorine in the ozone layer is due to CFCs from man-made products such as refrigerators, aerosols, solvents and other household items. Studies show that for every one hlorine atom that is released into the ozone layer, 100000 ozone molecules are destroyed. According to the statistics recorded in 1979, the ozone layer has decreased every single decade nearly 4% to 6% in mid-latitudes and 10% to 12% in higher southern latitudes.This constant decrease has left the ozone layer permanently damaged. Even though production of CFCs has drastically decreased over the past couple of years, the ozone layer is unable replace itself. Research on how Earth is affected by the depletion in the ozone layer 5. CFCs are so stable that the only way to break them is by exposure to strong UV radiation. When this occurs, the CFC molecule releases chlorine that can destroy 100000 ozone molecules.

Justice Is Justified By Plato s The Republic - 1689 Words

For centuries, people have been asking the question, what is justice? Although justice is not sincerely defined in Plato’s The Republic, both Socrates and Thrasymachus enter into a deep discussion over what justice truly is. After Socrates disproves Cephalus and Polemarchus explanations of justice, Thrasymachus declares that justice is â€Å"simply what is in the interest of the stronger party† (338c). Furthermore, he debunks justice altogether, arguing that justice is the strong exploiting the weak and that the unjust lifestyle is better than the just lifestyle. The two elements that this paper will break down is Thrasymachus’s idea of justice and how he thinks that being unjust is better than being just. Initially, Thrasymachus’s sentiment of justice is â€Å"simply what is in the interest of the stronger party† (338c). This causes Socrates to question Thrasymachus on what Thrasymachus means when he says â€Å"interest†. Socrates wants Thra symachus to simplify what he means by â€Å"interest† because everybody has different interests. For example, a bartender has the interest of making drinks to satisfy his customers, while a computer programmer has the interest of making programs to create advances in technology. As a result, Thrasymachus categorizes the interest limited to only rulers and answers Socrates’s question that interest is what is â€Å"right†, â€Å"each type of government enacts laws that are in its own interest, a democracy democratic laws, a tyranny tyrannical ones and so on; and inShow MoreRelatedPlato Vs. Rhetoric : Plato And Rhetoric2524 Words   |  11 PagesPlato and Rhetoric Plato is one of the greatest philosophers in history. Often his words and sayings resonate to this day. But, considering all what Plato has done, what is most peculiar about him is his condemnation of poets and sophists. Plato is in a constant fight to see that the way of true philosophy replaces these false arts. 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Opposite them is a wall and behind them is a burning fire and a pathway where

Why People Arent Talking About Diversity Statement Essay Samples Psycholgoy Graduate Application and What You Need to be Doing Right Now About It

Why People Aren't Talking About Diversity Statement Essay Samples Psycholgoy Graduate Application and What You Need to be Doing Right Now About It While it's true that there are a few excellent writers in college some find it extremely challenging to write. Minimum rates which are simple to afford You may have heard how your other peers pay for essay writing, but of course, as it's your very first time, you may be feeling anxious and a little worried. Every student demands help with homework from time to time. Define a particular interest. What You Don't Know About Diversity Statement Essay Samples Psycholgoy Graduate Application So for those who have an essay assigned that you will need help with, you can purchase essay online cheap from us. Before you start your essay, get used to the simple structure of admissions essays. If you must force an optional essay, it might be recommended to skip it. Your admissions essay is comparable to any other essay you've written. 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You could also get in touch with yo ur writer to supply some excess recommendations or request information regarding the order's progress. Read the brochure, check the site, gather all information possible to assist you determine what the admissions committee is searching for from potential students. Even then you're unable to discover the informative and accurate info. Once you own a master list, carefully analyze the information which you've listed. The New Fuss About Diversity Statement Essay Samples Psycholgoy Graduate Application A diversity statement sometimes takes a selection of forms. Evaluate all the information that you gather and determine your priorities. Some applications provide a string of questions. To write a productive diversity statement, you'll first have to think beyond the box a little. Before you write your admissions essay you have to have a comprehension of your targets and the way in which your experiences to date prepare you for pursuing your aims. 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`` Jesus And Violence `` By Jon Sobrino - 1369 Words

â€Å"Jesus and Violence† History has told us that violence has never been the solution to more violence. Nowadays, actions of violence are everywhere, in movies, television serious, in our daily life. We live in a world where power is often established through violence. But for a truly Christian, the form of violence the world chooses is always surpassed by the truth of the Scriptures. Violence is never the solution to resolve conflicts, because violence generates more violence. For many years, violence has been the answer to conflicts in many Latin American countries. According to Jon Sobrino, â€Å"Latin America is an extremely violent continent.† The option for the poor has arisen in Latin America, a continent that is mostly poor and Christian. Latin America has always been characterized by the difference of social classes and by the oppression of the poor. The option for the poor has arisen in Latin America, a continent that is mostly poor and Christian. As a result of these characteristics of injustices, the oppressed raised their voice to ask for their rights to be respected. The Catechism of the Catholic Church teaches that, â€Å"The dignity of the human person is rooted in his creation in the image and likeness of God.† Moreover, the demanding for basic respect for any individual no matter what social class someone belongs to, has always generated conflicts where violence seems to best the answer. As a better result, anyone could think that seeking dialogue would be theShow MoreRelatedEssay on Oscar Romero, Liberation Theology and the Catholic Church3831 Words   |  16 Pageslower-class in El Salvador. His teachings and beliefs that the marginalized peasants should be treated justly made him a living legend among his countrymen and isolated him from the nation’s corrupt elites. Although he never specifically condoned violence, his sermons played no small part in fomenting a bloody peasant uprising and civil war that raged for over a decade. In t he last few years, a strong effort has been made to canonize Romero. Although he is revered not only in his own country but

Comparison of colonies free essay sample

A century after Columbus sailed the ocean blue, Great Britains dreams would finally come true. In 1607, Britain established the first English settlement in the New World, Jamestown. This led to the establishment of the British colonies of Virginia, Massachusetts, all the way until the final colony Georgia. And although many may think that the colonies operated as one similar unit, the truth is all the colonial regions were very similar and different in social, political and economical structure. Throughout history, education was always important; this was the same for the colonies. Therefore, in all three colonial regions, education was offered to white boys. In the New England colonies, education was more common since the population was dense. However, in the Southern colonies education was not as common since people were spread far apart. This made it hard to find space to build schools; so instead, the rich hired tutors for their sons. We will write a custom essay sample on Comparison of colonies or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Religion was also very big in the colony. Each region had contrasting religion and ethnicity. In New England, Puritans dominated the area and established congregational churches. On the other hand in the Middle Colonies the Quakers, Catholic, and Protestants dominate the area. And in the South, the church of England dominated. Great colonies need great governments. The political structure in all colonial regions were similar and different. All of the colonies had governments, and governors leaded these governments. Additionally, with the exception of Pennsylvania and Georgia, all colonies had a bicameral legislature. Another similarity between the colonies was that only white males with property could vote. Although the colonies were similar in many political ways they were also very different. In New England, township government was the local form of government since everyone was so close. However, in the Southern colonies, county government was used since everyone was spread so far apart. The Middle colonies used a mix of both town and county government. Lastly, economy was both similar and different in the regions. The south used mainly slaves in the workforce; in fact, by 1760, there was approximately 400,000 slaves in the south. However, in New England, farmers raised their own workforce. It wasnt uncommon to see a family of over ten. Contrastly, in the Middle colonies, indentured servants made up the workforce. The industries in each colony was determined by the geography; therefore ndustry varied in each region. In the New England colonies, the main industries were fishing, whaling, shipbuilding, lumbering, and making beaver hats. This was not the same in the Middle colonies; their industries included beer, fur, glass, gun, iron, livestock, wagon, grains, and iron. On the other hand, the Southern colonies relied on mainly the tobacco industry. Some industrial similarities between the as were that tobacco was a main crop of the Middle and the Southern colonies and agriculture was very common in all the colonies. Furthermore, all colonies relied heavily on trade, nd smuggling became very common as well. Also currency was not used in any of the colonies because they had no metal due to the theory of mercantilism. In 1607, the settlement of Jamestown was established. Following Jamestown, Britain would plant a total of thirteen colonies over the next hundred years. These colonies can be grouped into three regions. The social, political, and economical structure of the colonial regions were very similar and ren What would one day become the great United States of America, was once only thirteen colonies, separated into three regions, and founded by one mother country.

Traditions have always had a substantial effect on the lives of human beings, and always will Essay Example For Students

Traditions have always had a substantial effect on the lives of human beings, and always will Essay Traditions have always had a substantial effect on the lives of human beings, and always will. Robert Frost uses many unique poetic devices in his poem Mending Wall, as well as many shifts in the speakers tone to develop his thoughts on traditions. The three predominant tones used are those of questioning, irony and humor. The speaker questions many things in relation to the wall that is being rebuilt. For example, Something there is that doesnt love a wall ll. 1, 35, is used to question what despises the walls presence. The speaker goes on to discuss the earths swells that make gaps in the wall l. , as well as the hunters, l. 5 not leaving a stone on a stone, l. 7 merely to please the yelping dogs with a rabbit. In line thirty, the speaker questions, Why do they make good neighbors because he believes that the wall is interfering with a possible relationship with his neighbor. We will write a custom essay on Traditions have always had a substantial effect on the lives of human beings, and always will specifically for you for only $16.38 $13.9/page Order now Another key question asked is What I was walling in or walling out, l. 33 to show that there is no difference when the wall is construct or not, both neighbors tasks are completed and no harm is done. Frost develops irony through his shifts in tone within the Mending Wall. The irony is most dramatic in lines fourteen and fifteen, And set the wall between us once again / We keep the wall between us as we go. The speaker now realizes that the wall separates the neighbors, but also unites them at mending time, for the purpose of placing themselves apart once again. Other ironical situations are developed by the speakers tone of questioning and his/her ability to initiate thoughts. It is rather apparent that in the early stages of the poem, the speaker does not comprehend the walls existence; eventually, the speaker begins to think for himself and express his feelings about the wall. The use of humor is used in many situations in the poem, not only to tell the truth, but also to express that the speaker believes that the wall is pointless. We have to use a spell to make them balance / Stay where you are until our backs are turned ll. 19,20, clearly shows that the speaker does not really care about the wall; he thinks of the mending time as a joke. The speaker also shows his disbelief in the wall by asking about cows l. 31, and then by blaming elves l. 36 for the destruction of the wall. My appleà ¢Ã¢â€š ¬Ã‚ ¦ across / And eat the conesà ¢Ã¢â€š ¬Ã‚ ¦ pines ll. 25,26, might be the most humorous, but truthful statement in the entire poem. These three key uses of tone are all brought together to represent Frosts view of traditions. The poem brilliantly depicts two neighbors, one who questions and finds flaws with the tradition of mending, and another who believes strongly in the tradition and is appreciative of the walls presence without really looking at the pointless effect. The contrasting neighbors thoughts can be related to society during Frosts time of writing as well as during the modern society of today in that many people would believe in the speakers perception of traditions while others would support traditions.