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Do Firms Time the Equity Market in a Non-Linear Manner? Evidence from the UK

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  • Hafezali Iqbal Hussain

Abstract

We provide an empirically motivated study to test the market timing theory of capital structure. The objective is to understand how managers in the United Kingdom finance their deficit. In line with the extant literature, we find that managers place greater reliance equity issues to finance deficit during periods of overvaluation and correspondingly increase debt issues when equities are undervalued. We further find that managers time the equity market in a surprisingly unique manner. Managers attempt to time issues in a non-linear manner whereby the increase in reliance on equity issues is only evident when the extent of overvaluation is not excessive. In addition, firms finance deficits with higher proportions of debt when equity prices are acutely suppressed. Our findings raise some important questions, which lead to serious implications on equity market-timing as a viable explanation for capital structure decisions. Furthermore, it poses serious implications questioning the debt-equity ratio preference of managers when resorting to external financing.

Suggested Citation

  • Hafezali Iqbal Hussain, 2014. "Do Firms Time the Equity Market in a Non-Linear Manner? Evidence from the UK," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 8(4), pages 63-74.
    • Handle: RePEc:ibf:ijbfre:v:8:y:2014:i:4:p:63-74
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    1. Iqbal Hussain, Hafezali & Mohd Farid, Shamsudin & Noor H, Jabarullah & Milad Abdelnabi, Salem & Fekri Ali, Shawtari, 2016. "Speed of Adjustment and Financial Constraints: Evidence from the UK," MPRA Paper 79265, University Library of Munich, Germany.
    2. Hussain, Hafezali Iqbal & Ali, Mohsin & Hassan, M. Kabir & El-Khatib, Rwan, 2023. "Asymmetric capital structure speed of adjustment, equity mispricing and Shari’ah compliance of Malaysian firms," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 965-975.
    3. iqbal hussain, hafezali, 2017. "Capital Structure of Malaysian Firms: Financing the Deficit and Shari’ah Compliance," MPRA Paper 80786, University Library of Munich, Germany.
    4. Hafezali Iqbal Hussain & Mohd Farid Shamsudin & Shahrullizuannizam Salehuddin & Noor H. Jabarullah, 2018. "Debt Maturity and Shari'ah Compliance: Evidence from Malaysian Panel Data," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 176-186.
    5. Iqbal Hussain, Hafezali & Mohd Farid, Shamsudin & Noor H, Jabarullah, 2016. "Non Linear Speed of Adjustment to Lead Leverage Levels and the Timing Element in Equity Issues: Empirical Evidence from the UK," MPRA Paper 79261, University Library of Munich, Germany.

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    More about this item

    Keywords

    Equity Market Timing; Capital Structure;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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