nr 016 - Does Market Timing Drive Capital Structures? A Panel Data Study for Dutch Firms

DNB Working Papers
Date 25 November 2004
This empirical study revisits the determinants of firms' capital structures. The main focus thereby is on the 'market timing theory', according to which the current level of the capital structure is the cumulative outcome of past attempts to ‘time the market’, i.e. issuing shares when equity is overvalued and repurchasing shares in case of undervaluation. Since the positive evidence for this theory found by Baker and Wurgler (2002) for the US, this strand of empirical literature is growing. This paper presents evidence for a sample of 135 Dutch listed non-financial firms over the period 1983-1997 as well as for a sub-sample of 45 Dutch firms that did an initial public offering (IPO). The research methodology follows Kayhan and Titman (2004), who model capital structure as a mix of market timing, pecking order and capital structure targeting behaviour. The findings for the Dutch sample do not find strong and persistent effects of market timing on capital structures. JEL codes: C23, G32 Key words: Market timing, Capital structure