Equity Market Timing and the Capital Structure of Swedish Firms

Abstract: We test the equity market timing hypothesis using yearly data from 1994-2013 for a sample of Swedish firms listed on Stockholm OMX. We do not find any support for market timing when using Kayhan and Titman's (2007) market timing measures. Our analysis of the effect on leverage following significant equity issues shows that the mean and median firm neutralize the effect from significant equity issues within one to three years. We find a positive relationship between market-to-book and the change in book leverage and also a negative relationship between market-to-book and equity issues during certain periods of time, in contrast to previous findings for the American market. As a final test we replace Kayhan and Titman's (2007) market timing measures with Baker and Wurgler's (2002) measure, which assigns weights to market-to-book ratios, and find an inverse relationship between this measure and both book and market leverage. Due to the short-lived effects on leverage following significant equity issues, it is possible that the inverse relationship is not attributable to market timing theory. Our findings combined are more in line with dynamic trade-off theory with adjustment costs.