Capital Structure: The Emprical Investigation of Market Timing Theory

This paper investigated Market Timing Theory and the effects on capital structure. We examined capital structure to past market valuations. The firms with low leverage tend to finance when their valuations were high, as measured by the market-to-book ratio (MTB). The firms with high leverage tend to be those that raise funds when their valuations were low. Temporary changes in market-to-book lead to permanent changes in capital structure, and temporary increases in market-to-book lead to permanent increases in cash balances. Then the results are difficult to reconcile with the pecking order and trade-off theory. The results are consistent with the theory that capital structure is the cumulative outcome of a series of market-timing-motivated financing decisions.We analysed data of 101 firms listed in Tehran Stock Exchange in the period 1378-1386. The result shows that Capital Structure is not consistent with Market Timing Theory.