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Application of Market Timing Theory: Evidence from Canadian Firms

Document Type : Original Research

Authors

1 Department of Accounting and Finance, Selçuk University, Konya, Turkey

2 Department of Accounting and Finance, Kabul University, Kabul, Afghanistan

Abstract

Internal and external finance are the two primary forms of funding for businesses. Internal financing is derived from retained profits, while external financing may come through borrowing money or the issuance of stocks. Businesses utilize it constantly to grow and stay alive, so the choices they make about finance are crucial. Market timing is vital for determining the appropriate financial structure for a company's success because volatility in market valuation greatly affects the capital structure. Capital structure requires a decision-making tactic that is an art to tackle complex situations. Modigliani and Miller started this ground-breaking study on capital structure in the field of corporate finance in 1958. After that, several theories were developed, but one of those theories was the market timing theory of capital structure, which explains that firms issue new stock when their share price is overvalued and repurchase shares when their share price is undervalued. These price fluctuations of equity will affect corporate financing decisions and ultimately corporate capital structures. The goal of this study is to test the applicability of market timing theory in the context of Canadian firms; thus, the data have been collected from the FINVIZ Stock Screener for the period (2022) and analyzed by a generalized linear model technique through the EViews 13. The research concludes that the market-to-book ratio has a statistically significant negative effect on market leverage as well as book leverage.

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COPYRIGHTS

©2024 The Author(s). This is an open access article distributed under the terms of the Creative Commons Attribution (CC BY 4.0), which permits unrestricted use, distribution, and reproduction in any medium, as long as the original authors and source are cited. No permission is required from the authors or the publishers.

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International Journal of Management, Accounting and Economics
Volume 11, Issue 2 - Serial Number 115
February 2024
Pages 183-193
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