Market timing and the debt-equity choice

W.B. Elliot, J. Koeter-Kant, R.S. Warr

Research output: Contribution to JournalArticleAcademicpeer-review


We test the market timing theory of capital structure using an earnings-based valuation model that allows us to separate equity mispricing from growth options and time-varying adverse selection; thus avoiding the multiple interpretations of book-to-market ratio. We find that equity market mispricing plays a significant, if not dominant, role in the security choice decision. Our results are robust to the inclusion of proxies for time-varying growth options and alternate methods of measuring misvaluation. © 2007 Elsevier Inc. All rights reserved.
Original languageEnglish
Pages (from-to)175-197
JournalJournal of Financial Intermediation
Publication statusPublished - 2008

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