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Interest rate changes and the timing of debt issues
Abstract
There is much recent interest in the role of market timing in firm financial decisions. Using a large detailed sample of corporate public debt issues, private placements, Rule 144A issues and bank loans over the period 1970-2006, we investigate the relationship between interest rate changes and issues of floating and fixed-rate debt. Our results indicate that both past and future rates are associated with issuance decisions. We examine whether firms are able to lower their cost of capital by anticipating future rate changes, controlling for firm characteristics and market conditions. Our findings suggest that evidence of timing success is dependent on the time interval and type of debt examined. Over the longest time intervals available in our data, we do not find evidence of timing ability for fixed-rate or floating-rate debt issues.
... However, surveying chief financial officers, Graham and Harvey (2001) find that market timing is an important aspect of corporate financial policy. Even among academics, it is widely accepted that market conditions have a significant influence on corporate financial policy [ (Baker and Wurgler, 2002;Fama and French, 2002;Frank and Goyal, 2003;Allayannis et al., 2003;Faulkender, 2005;Alti, 2006;Barry et al., 2009;Antonioua et al., 2009;DeAngelo et al., 2010) to name just a few]. While the literature accepts the existence of market timing efforts as a significant factor affecting financing decisions, our understanding of how quickly firms use the cash that is raised through these timing strategies is limited. ...
... While cash holding has been studied extensively [(Opler et al., 1999;Ozkan and Ozkan, 2004;Faulkender and Wang, 2006;Han and Qiu, 2007;Bates et al., 2009) among others], market timing implications for cash holding has not received much attention. Studies (Baker et al., 2003;Faulkender, 2005;Allayannis et al., 2003;Barry et al., 2009;Antonioua et al., 2009;Bolton et al., 2011) point out that firms time the market to reduce their overall cost of capital, that is, they have no immediate need or an investment plan for the capital. Thus, the capital that is raised as the result of a market timing strategy should be spent slower than the capital that is raised for financing a project. ...
... However, the literature on how quickly firms deploy the cash they raised through market timing efforts is scant. The motivation for market timing strategies is attributed to minimizing cost of capital [(Baker et al., 2003;Faulkender, 2005;Allayannis et al., 2003;Barry et al., 2009;Antonioua et al., 2009;Bolton, 2011) to name a few]. Thus, the success of market timing strategies should be examined through the lens of cost of capital: whether timing the market by financial managers successfully reduces cost of capital and thereby increases value to shareholders. ...
Purpose
This study aims to examine the behavior of cash raised through market timing efforts and the success of such efforts in creating value to shareholders.
Design/methodology/approach
It is shown that in two quarters, subsequent to raising equity, cash balance of market timers is higher but after that, there is no significant difference between timers and non-timers. Results of speed of adjustment regressions indicate that market timers move faster toward their target cash levels.
Findings
Market timers are small firms that suffer from asymmetric information. They have limited access to capital market, and raising external capital is an opportunity that should be timed. The results suggest that, on average, these firms are managed by more able executives, who are 10 per cent more likely to time the market; however, it is found that timing efforts are unsuccessful in creating value to shareholders even after controlling for the mitigating effect of managerial ability. Subsequent to market timing, on average, market timers earn significantly lower abnormal return over different holding periods relative to their comparable non-timer counterparts.
Originality/value
Overall, the results undermine the validity of market timing as a value-maximizing financial policy.
... Similarly, Antoniou, Zhao, and Zhou (2009) find that corporate debt issuances are mainly driven by market timing considerations. Barry, Mann, Mihov, and Rodriguez (2009) investigate the relationship between interest rate fluctuations and issues of floating and fixed rate debt. They find that debt issuance depends on past and future interest rate. ...
... Baker, Taliaferro, and Wurgler (2006) response that the excess of bond yields cannot be explained solely by the pseudo market timing. Barry, Mann, Mihov, and Rodriguez (2009) tested the ability of managers to predict the market trend and show that they are issuing more debt when interest rates are lower than historical rates, which means a market timing turned to the past and not to the future. ...
Recent literature argues that market timing becomes the factor that shapes financing policies. However, empirical studies on debt market timing still less numerous than those on equity market timing. This paper seeks to investigate the relevance of market timing considerations on debt issues using a panel of Tunisian and French listed firms. We have documented that net debt issuance is a decrease function of the market monetary rate. Moreover, our findings reveals that Tunisian firms succeed to raise their values by issuing debt when they expect that interest rates will increase. By contrast, french firms fail to reduce their overall cost of capital.
... Although it is reasonable to expect managers to attempt to time the market—indeed, according to the survey by Graham and Harvey (2001), many managers state that they do attempt to time their security issues—it is quite another thing to expect those managers to have precognition about future market movements. Barry et al. (2008 Barry et al. ( , 2009) show that corporate managers react to recent market conditions in coming to their external financing decisions (―backward-looking timing‖ in their terminology), but have limited success in ―forward-looking timing.‖ If market timing means that firms can take advantage of private information before it becomes public (e.g., asymmetric information), then our results do not challenge this view. ...
... Although it is reasonable to expect managers to attempt to time the market-indeed, according to the survey by Graham and Harvey (2001), many managers state that they do attempt to time their security issues-it is quite another thing to expect those managers to have precognition about future market movements. Barry et al. (2008Barry et al. ( , 2009 show that corporate managers react to recent market conditions in coming to their external financing decisions (-backward-looking timing‖ in their terminology), but have limited success in-forward-looking timing.‖ ...
Both market timing and investment-based theories of corporate financing predict under-performance after firms raise capital, but only market timing predicts that the composition of financing (equity compared with debt) should also forecast returns. In cross-sectional tests, we find that the amount of net financing is more important than its composition in explaining future stock returns. In the time series, investment-based factor models explain abnormal stock performance following a variety of corporate financing events that previous studies link to market timing. At the aggregate level, the amount of new financing is also more important for future market returns than its composition. Overall, our joint tests reveal that measures of real investment are correlated with future returns and measures of managerial market timing are not.
... Huang and Ritter (2005) have proposed the theory of market timing, using a composite indicator of market valuation, and have observed the continuous impact of market timing on capital structure. Market timing also signifies the time signaling, which has been examined in many facets including initial public offerings, seasoned equity offerings (Alti 2006), dividend policies (Marsh 1982;Flannery and Rangan 2006;Hovakimian 2006), and duration of debt issuance (Butler et al. 2004;Barry et al. 2009). ...
Financial signaling and stock return synchronicity may not be at crossroads. This paper optimizes the signaling effect of firms’ financial indicators on stock return synchronicity. The ultimate objective is to align firms’ financial signaling and stock return synchronicity, which implies a benefit of hedging against fluctuations in the stock market index. The data cover quarterly periods from June 1992 to March 2022 for the non-financial firms listed in the DJIA30 and NASDAQ100. This paper examines the observed return synchronicity as the dependent variable. The independent variables are classified into six groups namely, Solvency (or Liquidity) ratios, Assets Efficiency ratios, Expense Control ratios, Debt (or Leverage) ratios, Profitability ratios, and Dividend ratios. The analysis is conducted on two different groups. The first group examines the observed firms’ financials that affect observed stock return synchronicity. The second group examines optimal firms’ financials that help optimize stock return synchronicity. The final results show that (a) current stock return synchronicity is affected positively by cash ratio, and negatively by receivables and historical growth of earnings; (b) optimal stock return synchronicity can be elevated using significant financial indicators namely, Inventory/Current Assets, Net Working Capital/Total Assets, Net worth/Fixed Assets, and Sales Annual Growth; (c) agency conflicts between managers and shareholders can be mitigated by the aforementioned financial indicators, which do not include debt financing being the common source of agency conflicts; and (d) dividends are still insignificant to stock return synchronization.
... For studies on bank debt, see Mikkelson and Partch (1986), Billett, Flannery, and Garfinkel (1995), Mosebach (1999), and Ongena and Roscovan (2013). 8 See , Livingston and Zhou (2002), Chaplinsky and Ramchand (2004), Barry, Mann, Mihov and Rodriguez (2009) and Huang and Ramirez (2010) for more details on the rapid growth of the Rule 144A market. 9 For example, both and Livingston and Zhou (2002) examine the effects of Rule 144A debt offerings on bond yields. ...
This paper documents a negative market reaction to the announcement of high-yield Rule 144A debt. Within this setting, based on a large sample of non-financial US-listed firms, we examine: (a) what drives this negative reaction and (b) the motivation for issuing such debt. Our findings suggest that the negative market impact is mainly driven by short-selling pressure from convertible bond arbitrageurs. We provide a plausible “demand-side” explanation (i.e. last-resort debt financing) for why 144A debt issuers are willing to pay higher risk-adjusted yields and to knowingly suffer stockholder wealth destruction.
... For studies on bank debt, see Mikkelson and Partch (1986), Billett, Flannery, and Garfinkel (1995), Mosebach (1999), and Ongena and Roscovan (2013). 8 See Fenn (2000), Livingston and Zhou (2002), Chaplinsky and Ramchand (2004), Rodriguez (2009) andHuang andRamirez (2010) for more details on the rapid growth of the Rule 144A market. 9 For example, both Fenn (2000) and Livingston and Zhou (2002) examine the effects of Rule 144A debt offerings on bond yields. ...
This paper examines why non-financial publicly traded firms knowingly issue wealth destroying Rule 144A debt, which is associated with a negative announcement return and a higher yield. We provide a plausible “demand-side” explanation (i.e. last-resort debt financing) for the motivation for issuing such debt. We also provide evidence as to what drives this negative reaction. Our findings suggest that the negative market impact is mainly driven by short-selling pressure from convertible bond arbitrageurs.
... For studies on bank debt, seeMikkleson and Partch (1986),Billett, Flannery, and Garfinkel (1995),Mosebach (1999), and Ongena and Roscovan (2013). 8 See Fenn(2000), Livingston and Zhou (2002),Chaplinsky and Ramchand (2004),Barry, Mann, Mihov and Rodriguez (2009) and Huang and Ramirez (2010) for more details on the rapid growth of the Rule 144A market. 9 For example, both Fenn(2000)andLivingston and Zhou (2002) examine the effects of Rule 144A debt offerings on bond yields. ...
This paper documents a negative market reaction to the announcement of high-yield Rule 144A debt. Within this setting, based on a large sample of non-financial US-listed firms, we examine: (a) what drives this negative reaction and (b) the motivation for issuing such debt. Our findings suggest that the negative market impact is mainly driven by short-selling pressure from convertible bond arbitrageurs. We provide a plausible “demand-side” explanation (i.e. last-resort debt financing) for why 144A debt issuers are willing to pay higher risk-adjusted yields and to knowingly suffer stockholder wealth destruction.
... Our results are not sensitive to excluding relative issue size as a regressor. 14 For example, managers can time debt issues to changing interest rates(Baker et al., 2003;Barry et al., 2009). 15 CEO delta is also significantly different between bond issuers and equity issuers, but as we show later, the difference disappears in the multivariate regressions.Z. ...
We examine whether executive stock options can induce excessive risk taking by managers in firms' security issue decisions. We find that CEOs whose wealth is more sensitive to stock return volatility due to their option holdings are more likely to choose debt over equity as a capital-raising vehicle. More importantly, the pattern holds not only in firms that are underlevered relative to their optimal capital structure but also in overlevered firms. This evidence is inconsistent with executive stock options aligning the interests of managers and shareholders; rather, it supports the hypothesis that stock options sometimes make managers take on too much risk and in the process pursue suboptimal capital structure policies.
This study examines the importance of financial constraints and competition in the product market of the decision to repurchase shares in the period 2011-2021in the Iranian financial markets. This research has been examined in a statistical sample of 120 companies. We have found that firms with financial constraints are more likely to repurchase shares with debt financing; however, firms without financial constraints are more likely to make redemption purchases with debt financing only when debt market conditions are favorable. We also found that the level of industry competition is an important factor in managers' decisions. Highly competitive companies, therefore, pay their extra cash through redemption of shares, which is stronger in times of financial crisis.
This study explores the importance of financial constraints and product market competition on the share repurchase decision. We find that financially constrained firms are more likely to conduct debt-financed share repurchases. Financially unconstrained firms, however, tend to conduct debt-financed repurchases only when debt market conditions are favourable. We also find that the level of industry competition is a significant factor behind managers’ decisions. High (low) industry competition forces financially unconstrained and undervalued firms to reduce (increase) the agency costs of free cash flows from overvalued debt financing. The implication is that firms in high-competition industries disburse excess cash through share repurchases. We find that this effect is strongest in periods outside financial crises.
We examine the unique role played by institutional investors in the private corporate debt market for Rule 144A debt. We use the recent global financial crisis as a quasi-natural experiment to study how qualified institutional buyers (QIBs) facilitated funding to the foreign debt issuers in U.S. Using an exhaustive sample of foreign bond issuances in the U.S. from over 65 countries between 1990 and 2013, we examine (a) corporate decisions involving debt choice and market timing, and (b) determination of offer spreads. Our findings collectively support the notion that QIBs enabled funding in the foreign 144A debt market despite the financial crisis.
Do bond issuers successfully time the market? To answer this question, we compare market conditions on an issue day with conditions on days in a window around the issue day. We find that compared with windows of 21 days around issue days, bond issuers time the risk-free rate better than pure chance, with an average gain of 8 basis points; bond issuers also time the CDS spread better than pure chance, with an average gain of 12 basis points. Issuers who issue bonds more frequently do better than less frequent issuers do. Both risk-free rates and CDS spreads are lower on days when shelf-registered bonds are issued than they are on the days surrounding the issue days. Only CDS spreads are lower on days when privately placed bonds are issued.
Corporate bondholders may be concerned about the value of their bonds when the firm issues more bonds. Using bond data from TRACE from 2005 to 2017, we study the impact of new bond issues and relative maturity on the price of previously existing bonds. We find negative and significant average abnormal returns for existing bonds over a three‐day event window. Consistent with the adverse consequences of relative maturity of the new issuance, existing bond market returns are more strongly negative when the newly issued bonds mature before the existing bonds. A funded debt covenant attenuates the negative return.
We compare debt issuances by U.S. and international firms to examine differences in the borrowing costs, measured by yield spread, between the Rule 144A and public debt markets across countries and over time in 1991-2008 period. We find that the yield spread is 48 basis points higher in the 144A market than in public bond market, after controlling for other determinants of yield spread. The non-U.S. developed country issuers pay a similar borrowing cost as their U.S. peers do, but emerging country issuers pay significantly higher costs to access the U.S. debt market. The results hold after controlling for additional country-specific legal and institutional variables. We also find that the borrowing costs increased after the enactment of the 2002 Sarbanes-Oxley Act, and surged to the highest level in 2008 during the financial crisis for both U.S. and international issuers.
We provide an assessment of the determinants of the risk premium paid by non-financial corporations on long-term bonds. By looking at 5,500 issues over the period 2005-2012, we find that in recent years the sovereign debt market turbulence has been a major driver of corporate risk. Compared with the three-year period 2005-07 before the global financial crisis, in the years 2010-12 Italian, Spanish and Portuguese firms paid on average between 70 and 120 basis points of additional premium due to the negative spillovers from the sovereign debt crisis, while German firms received a discount of 40 basis points.
We explore the effect of governance on bond yield-spreads and ratings in a multinational sample of firms. We find strong evidence that ultimate ownership (i.e., the voting/cash-flow rights wedge) and family control have a positive and significant effect on bond yield-spreads, and a negative and significant effect on bond ratings. Control in the hands of widely held financial firms has a positive effect on bond ratings only, while State control has no effect on either bond yield-spreads or ratings. We also find that a higher protection of debtholders’ rights generally reduces bond yield-spreads and increases bond ratings. Our results additionally show that, for both bondholders and rating agencies, the enforcement of debt laws is crucially important. Finally, we document a negative effect of debt covenants on debt costs when there is a high expropriation risk and poor creditor rights protection.
Several studies make evidence that market timing becomes the factor that shapes financing policies. However, debt market timing still less developed compared to equity market timing. This paper investigates the relevance of market timing considerations on the debt issuance using a panel of 30 Tunisian listed firms and 100 French firms of the stock market index SBF 120. Consistent with the market timing theory, we find that firms tend to issue debt when interest rate are low and are less likely to take debt issuance decisions when they perceive equity market conditions as more favorable. This evidence suggests that borrowing policies are shaped by market timing considerations.
This paper addresses the issue of data quality in the real estate market. In many countries, the returns indices for direct markets are provided by several sources differing in terms of the methodology adopted and index weights. These differences produce a lack of informative standardization, which could negatively affect the ability of market participants to make predictions. Focusing on the Italian real estate market, the aim of this paper is therefore twofold: to investigate the reliability of property data sources and to assess the impact for financial intermediaries involved in real estate investing. Our results show a significant level of divergence between the data, and considerable implications for those financial institutions dealing with them. These findings conflict with the requirements of an efficient (or at least sub-efficient) market.
Treating the negative effects caused by the global financial crisis is a task of state institutions. Concerned for the impact of these effects, governments are carrying out and implementing state policies through implementing political, legal and economic measures against the logic of economic liberalization. This government activity in the function of regulating economic relations is being performed through carrying out and implementing non-tariff economic barriers even though such actions are against the principles of the most important international institutions and the logic of liberal development itself. Due to the significance this crisis has and is going to have even with the emergence of forms of criminality, state institutions should rapidly get back to finding efficient monetary, financial and legal measures and policies for rescue. The role of state intervention not only is inevitable, but it is necessary and the actions should be realistic, rational, efficient, and constructive. The first result emerging from this situation is the fact that now banks and other institutions are creating special bounds with the state. The role of state should focus through integrated political, economic and legislative strategies towards strengthening the bank system, credit market system, protection of investments, change of tax policies, capital stimulation, and fighting crime. All this should reflect an anti-crisis strategy which at the very least would immunize the economic systems in countries attacked by the crisis.
We investigate the intertemporal relation between information asymmetry and equity issues, and particularly focus on which firms drive this relation. We find that when information asymmetry for a particular firm is low compared to the recent past, the firm is more likely to issue equity as opposed to debt. Importantly, this intertemporal association is driven by firms with high levels of information asymmetry. These firms are more prone to adverse selection costs and thus have more to gain by issuing equity after a narrowing of the information gap between managers and investors. Our findings are robust to various firm-specific proxies for information asymmetry.
We investigate the role of long-term debt in influencing overinvestments by analyzing the pattern of abnormal investments around a new debt offering by unlevered firms. Before being levered when the disciplining role of debt is missing, firms retain excessive amounts of cash. The introduction of debt leads to a dramatic decline in cash ratios and the relation is stronger for firms classified as having poor investment opportunities. For the sub-sample of firms that overinvest in real assets, issuing debt leads to a reduction in abnormal capital expenditures. The decline in overinvestments is explained by debt service obligations that reduce discretionary funds under managerial control. Further, the reduction in overinvestments has a positive impact on equity value. These conclusions hold in other settings where there is a dramatic change in firms' capital structures providing strong support for the hypothesis that debt reduces overinvestments.
In 1990, the SEC approved Rule 144A, a reform permitting firms to raise capital from "qualified institutional buyers" without requiring registration of the securities and compliance with U.S. GAAP. The rule was intended to help international firms reduce the costs of meeting U.S. disclosure standards. We examine the borrowing costs of international issuers in the 144A market. Investment grade 144A debt has significantly higher yield spreads, whereas high-yield 144A debt has yield spreads comparable to public debt. The results suggest a bifurcation of the markets, where high-quality firms issue in both markets but face higher spreads in the 144A market and low-quality firms issue only in the 144A market.
The maturity of new debt issues predicts excess bond returns. When the share of long-term debt issues in total debt issues is high, future excess bond returns are low. This predictive power comes in two parts. First, inflation, the real short-term rate, and the term spread predict excess bond returns. Second, these same variables explain the long-term share, and together account for much of its own ability to predict excess bond returns. The results are consistent with survey evidence that firms use debt market conditions in an effort to determine the lowest-cost maturity at which to borrow.
In this short note we respond to the argument advanced by Baker, Taliaferro, and Wurgler (2006) that our criticism of the market timing literature is simply a reinterpretation of Stambaugh's (1999) small sample bias. We show analytically how structural breaks in an economic time-series may result in spurious, or nonsense, predictive regressions, whether or not there is any small-sample bias at play. We also provide a simple example showing that the magnitude of this bias could explain the predictive power of certain variables.
"Using a sample that comprises more than 14,000 new issues of corporate debt for the period 1970-2001, we examine the relation between debt issues and the level of interest rates relative to historical levels. Consistent with recent survey evidence, we find that companies issue more debt, more debt relative to investment spending, and more debt compared to equity when interest rates are low relative to historical rates. The effects continue to hold when we control for other variables that influence debt issuance and when we account for refinancing." Copyright (c) 2008 Financial Management Association International..
We survey 392 CFOs about the cost of capital, capital budgeting, and capital structure. Large firms rely heavily on present value techniques and the capital asset pricing model, while small firms are relatively likely to use the payback criterion. A surprising number of firms use firm risk rather than project risk in evaluating new investments. Firms are concerned about financial flexibility and credit ratings when issuing debt, and earnings per share dilution and recent stock price appreciation when issuing equity. We find some support for the pecking-order and trade-off capital structure hypotheses but little evidence that executives are concerned about asset substitution, asymmetric information, transactions costs, free cash flows, or personal taxes.
This paper hypothesizes that hot convertible debt windows represent periods with lower convertible debt-related financing costs. Supporting this premise, we find that the stock price impact of Western European convertible debt announcements is significantly less negative during hot convertible debt windows. Importantly, this result holds while controlling for equity and straight debt issuance volumes and for macroeconomic conditions. In addition, stockholders are less sensitive to issuer- and issue-specific financing costs during hot convertible debt markets. Overall, these findings indicate that hot convertible debt markets represent windows of opportunity for convertible debt issuance. Firms with high idiosyncratic financing costs act accordingly by timing their convertible debt offering during a hot market.
I document the shift of high-yield issuance from the public to the Rule 144A private placement market and exploit data on credit spreads to investigate whether investors regard disclosure in the two markets as comparable. The key implications of the inadequate-disclosure hypothesis are that investors require premiums on 144A securities and that such premiums are largest for first-time bond issuers and privately owned firms about whom less information is publicly available. I find that 144A premiums, though positive initially, have vanished over time, and I find no evidence of larger 144A premiums for first-time issuers or private firms. Investors do, however, require premiums of first-time issuers, and to a lesser extent of privately owned firms, regardless of whether securities are issued in the 144A or public market. These findings imply that sophisticated investors do not value the incremental information provided by securities registration, but do value ongoing disclosure.
We analyze the importance of firm-specific and country-specific factors in the leverage choice of firms from 42 countries around the world. Our analysis yields two new results. First, we find that firm-specific determinants of leverage differ across countries, while prior studies implicitly assume equal impact of these determinants. Second, although we concur with the conventional direct impact of country-specific factors on the capital structure of firms, we show that there is an indirect impact because country-specific factors also influence the roles of firm-specific determinants of leverage.
Understanding if credit risk is driven mostly by idiosyncratic firm characteristics or by systematic factors is an important issue for the assessment of financial stability. By exploring the links between credit risk and macroeconomic developments, we observe that in periods of economic growth there may be some tendency towards excessive risk-taking. Using an extensive dataset with detailed information for more than 30Â 000 firms, we show that default probabilities are influenced by several firm-specific characteristics. When time-effect controls or macroeconomic variables are also taken into account, the results improve substantially. Hence, though the firms' financial situation has a central role in explaining default probabilities, macroeconomic conditions are also very important when assessing default probabilities over time.
Securities issued under Rule 144A do not have to file a public registration statement with the Securities and Exchange Commission, but can be sold only to qualified financial institutions. This paper examines industrial and utility bonds issued under Rule 144A. Rule 144A issues are found to have higher yields than publicly issued bonds after adjusting for risk. Yield premiums are higher if the issuer does not file periodic financial statements with the SEC. The yield premiums of Rule 144A issues may be due to lower liquidity, information uncertainty, and weaker legal protection for investors. Bonds issued under Rule 144A may have registration rights, which require the issuer to exchange the bonds for public bonds within a stated period, or pay higher yields. While high-yield bonds usually have registration rights, we find that the majority of investment-grade bonds do not. Registration rights have a greater impact on yields for high-yield than for investment-grade bonds. Underwriter fees for Rule 144A issues are not significantly different from underwriter fees for publicly issued bonds.
We survey managers in 16 European countries on the determinants of capital structure. Financial flexibility and earnings per share dilution are primary concerns of managers in issuing debt and common stock, respectively. Managers also value hedging considerations and use “windows of opportunity” when raising capital. We find that although a country’s legal environment is an important determinant of debt policy, it plays a minimal role in common stock policy. We find that firms’ financing policies are influenced by both their institutional environment and their international operations. Firms determine their optimal capital structures by trading off costs and benefits of financing.
This paper provides a rational explanation for the apparent ability of managers to successfully time the maturity of their debt issues. We show that a structural break in excess bond returns during the early 1980s generates a spurious correlation between the fraction of long-term debt in total debt issues and future excess bond returns. Contrary to Baker, Taliaferro, and Wurgler (2006) , we show that the presence of structural breaks can lead to nonsense regressions, whether or not there is any small sample bias. Tests using firm-level data further confirm that managers are unable to time the debt market successfully. Copyright 2006 by The American Finance Association.
Numerous studies document long-run underperformance by firms following equity offerings. This paper shows that underperformance is very likely to be observed "ex-post" in an efficient market. The premise is that more firms issue equity at higher stock prices even though they cannot predict future returns. "Ex-post", issuers seem to time the market because offerings cluster at market peaks. Simulations based on 1973 through 1997 data reveal that when "ex-ante" expected abnormal returns are zero, median "ex-post" underperformance for equity issuers will be significantly negative in event-time. Using calendar-time returns solves the problem. Copyright (c) 2003 by the American Finance Association.
Many studies find that aggregate managerial decision variables, such as aggregate equity issuance, predict stock or bond market returns. Recent research argues that these findings may be driven by an aggregate time-series version of Schultz's (2003, "Journal of Finance" 58, 483-517) pseudo market-timing bias. Using standard simulation techniques, we find that the bias is much too small to account for the observed predictive power of the equity share in new issues, corporate investment plans, insider trading, dividend initiations, or the maturity of corporate debt issues. Copyright 2006 by The American Finance Association.
This paper examines whether firms are hedging or timing the market when selecting the interest rate exposure of their new debt issuances. I use a more accurate measure of the interest rate exposure chosen by firms by combining the initial exposure of newly issued debt securities with their use of interest rate swaps. The results indicate that the final interest rate exposure is largely driven by the slope of the yield curve at the time the debt is issued. These results suggest that interest rate risk management practices are primarily driven by speculation or myopia, not hedging considerations. Copyright 2005 by The American Finance Association.
Can managers successfully time the maturity structure of their debt issues?
- Butler