Market Timing And External Financing Decision

The classical MM theorem,one important theory of capital structure,takes the effective market as the research hypothesis,and thinks that the changes of the financing behavior and the capital structure can not change the value of the enterprise,that is,the capital structure has nothing to do with the market value of a firm.On the basis of the MM theory,researchers have continuously studied for decade years,and theorized the capital structure theory system represented by the two major schools of the trade-off theory and the pecking order theory.But they still keep the key hypothesis of effective market hypothesis.However,with the deepening of the research,the researchers found that under the assumption that the market is not fully effective and there are limited rational investors,the enterprise managers will timing the market when they make debt-equity choices.Stein(1996)first proposed the market timing hypothesis,which pointed out that the irrational factors led to excessive overvaluation of the stock market,the rational managers may use the excessive enthusiasm of investors,through the issuance of more stocks to get more money.Baker and Wurgler(2002)pioneered the theory of market timing in the"market timing and capital structure",they thinks that when the market value is overvalued,companies with financing needs will have lower leverages;when the market value is undervalued,companies with financing needs will have higher leverages.With the proposal of market timing theory,more and more researchers focus on what the enterprises should do when they make financing decisions and the influences of these decisions on capital structures under the circumstances of the market is not fully effective.After the market timing theory has been put forward,many researchers at home and abroad have conducted empirical tests about it,among these studies,one aspect has focused on whether corporate managers' issuance decisions reflect attempts to time mispricing in their securities and whether those attempts are successful.A considerable number of studies have shown that the phenomenon of market timing does exist,one of the most important ways is to examine the relative subsequent stock performances of equity and debt issuers.Because China's capital market started late,which is still influenced by a large number of invalid and irrational behaviors,and there are a lot of individual investors who have heavy speculative trendency and tend to take short-term transaction,the market price fluctuates drastically.Under this market background,China's listed companies'capital structure and financing preferences are different from developed countries'.Based on this situation,the traditional theories of capital structure are somewhat unacceptable to the reality of China.In contrast,the market timing theory is more in line with China's current situation.Based on the stock transaction data and corresponding financial data from 2007 to 2017 of A-share listed companies in China,this paper discusses the relationship between the external financing methods of listed companies and the future stock returns,and discusses whether the managers of listed companies attempt time the market using internal information.In the empirical research part,we use earnings announcement rate of return and year-ahead stock returns as the two representatives of future stock returns,we construct equity ratio and net external financing using the cash flow statement data as the representatives of external financing decision,and detect whether corporate managers attempt to time the market using the interaction item of dummy variable and equity ratio variable.The regression results of the earnings announcement tests show that companies which repurchase stocks will earn higher return than debt,this result insists with the market timing theory,and indicates that the managers of listed companies attempt time the market using internal information while making financing decisions.In the year-ahead return tests,we use BHAR method to construct the 12-month buy and hold return as the proxy variable of the annual rate of return.The regression results are in line with the market timing theory and the power of the test is enhanced after we add R&D investment as a control variable.