Empirical Testing for Market Timing Theory of Capital Structure in Developing Markets

This paper is devoted to investigation of managers’ ability to time the market for making decision about debt-equity financial activities on the emerging capital markets. We find that underperformance in case of more equity issue relative to debt issue is statistically reliable even controlling for investment activities and level of external financing. Moreover, managers are able to repurchase more equity relative to debt when firms are undervalued. In line with the market timing theory, we conclude that debt-equity composition of net financing predicts the long run stock performance. However, the composition of external financing does not influence the returns around earnings announcement. Controlling for the analysts’ forecast error we do not find evidence that analysts’ overoptimism negatively influence subsequent stock performance.