Persistence of Market Timing

and equity repurchases (t =−6.83) is significantly negative.³⁶ In terms of marginal effects (not reported), the probability to issue equity (debt) increases (decreases) by economically important 0.35×0.118 = 4.13 (3.08) percentage points when comparing an overvalued firm (in the fifth skew-ness quintile) to an undervalued firm (in the first skewskew-ness quintile).

In contrast, the probability for equity repurchases (debt retirement) de-creases (inde-creases) by 3.96 (2.28) percentage points.

Taken together, we find that idiosyncratic skewness – and thus mispric-ing – plays an important role in both issuance and repurchase decisions.

When stocks are overvalued, firms issue significantly more equity (less debt) and retire more debt (repurchase less equity). As a result, idiosyn-cratic skewness is significantly negatively related to both the leverage level and changes in leverage. Our results thus confirm a strong market timing effect in the short run.

Table 5.4:Persistence of Market Timing - Leverage Level

Dependent variable:

Lev_t+1 Lev_t+2 Lev_t+3 Lev_t+4

(1) (2) (3) (4)

Skew_t −0.03^∗∗∗ −0.02^∗∗ −0.01 −0.004

(−3.90) (−2.20) (−1.30) (−0.46) SIZE_t−1 0.01^∗∗∗ 0.01^∗∗∗ 0.01^∗∗∗ 0.01^∗∗∗

(5.13) (5.00) (5.12) (5.15)

T N G_t−1 0.18^∗∗∗ 0.17^∗∗∗ 0.16^∗∗∗ 0.15^∗∗∗

(15.65) (14.16) (12.96) (12.02) P RF_t−1 −0.19^∗∗∗ −0.17^∗∗∗ −0.16^∗∗∗ −0.16^∗∗∗

(−7.65) (−6.80) (−6.24) (−6.18) MB_t−1 −0.02^∗∗∗ −0.01^∗∗∗ −0.01^∗∗∗ −0.01^∗∗∗

(−10.03) (−9.33) (−8.73) (−7.76) RD_t−1 −0.31^∗∗∗ −0.28^∗∗∗ −0.26^∗∗∗ −0.27^∗∗∗

(−7.53) (−6.74) (−5.75) (−5.93) RDD_t−1 0.03^∗∗∗ 0.03^∗∗∗ 0.02^∗∗∗ 0.02^∗∗∗

(5.79) (5.45) (4.83) (4.58)

SIC fixed effects Yes Yes Yes Yes

Cluster adj. Yes Yes Yes Yes

Adjusted R² 0.22 0.21 0.20 0.20

Table 5.4 presents results for OLS regressions of future leverage ratios on idiosyncratic skewness (Skew_t) and several control variables motivated by the literature. In line with Baker and Wurgler (2002) and Alti (2006), we lag control variables by one year as contemporaneous controls may be noisy. The notation and construction of leverage ratios and controls follows Sections 5.2.2 and 5.2.3, respectively. Stars indicate significance at the 10% (*), 5% (**), and 1% (***) level andt-values (in parentheses) are based on cluster-adjusted standard errors. We cover a sample period from 1971 to 2020 and do not report the intercept.

While both the coefficient estimates and the statistical significance of control variables remain largely unchanged, the impact of idiosyncratic skewness gradually decreases fromLev_t+1toLev_t+4. Although the impact onLev_t+1(Model 1) remains highly significant and is comparable to the short-term effect (t=−3.90), statistical significance with respect toLevt+2

(Model 2) already reduces to the 5%-level (t=−2.20) and the coefficient

estimate is cut in half. After only three years (Model 3), significance dis-appears completely (t=−1.30). Finally, in Model (4), both the economic and the statistical effect are close to zero. Our results are thus in line with Alti (2006), Hovakimian (2006), and Mahajan and Tartaroglu (2008) who also find that the impact of market timing is not persistent.³⁷

In Table 5.5, we follow Alti (2006) and replace leverage levels by the cumulative change in leverage from fiscal year t−1 to t+τ.³⁸ In Panel A, we employ the control variables outlined in Section 5.2.3 as well as industry fixed effects. Again, the impact of idiosyncratic skewness gradually decreases from Model (1) to Model (4). However, contrasting the results in Table 5.4, the economic significance int+ 1 (Model 1) even slightly increases. Moreover, the impact on the cumulative change in leverage fromt−1 tot+ 4 (Model 4) remains significant at the 5% level (t =−1.97) and finally turns insignificant in t+ 6 (not reported). At a first glance, this finding implies a higher persistence of market timing effects than previously documented. However, as outlined in Section 5.3.1, there is a positive drift in Lev_t, which is why a long-lasting impact on

∆Lev_t+τ does not necessarily imply that market timing effects persist. In Table 5.A.1 (reported in the Appendix), we provide summary statistics for the cumulative change in leverage. Most importantly, we find that the drift increases inτand exceeds the impact of idiosyncratic skewness after only two years. As a result, the change in leverage remains positive even if the highest skewness quintile is considered. In Panel B of Table 5.5, we

37In unreported results, we compute the external-finance-weighted average idiosyncratic skewness in the spirit of Baker and Wurgler (2002) and do not find a significant impact.

38

Table 5.5:Persistence of Market Timing - Change in Leverage

Panel A: Industry Fixed Effects Dependent variable:

∆Lev_t+1 ∆Lev_t+2 ∆Lev_t+3 ∆Lev_t+4

(1) (2) (3) (4)

Skew_t −0.05^∗∗∗ −0.03^∗∗∗ −0.02^∗∗∗ −0.02^∗∗

(−9.39) (−3.56) (−3.25) (−1.97)

Controls Yes Yes Yes Yes

SIC fixed effects Yes Yes Yes Yes

Firm fixed effects No No No No

Cluster adj. Yes Yes Yes Yes

Adjusted R² 0.06 0.07 0.11 0.13

Panel B: Firm Fixed Effects Dependent variable:

∆Lev_t+1 ∆Lev_t+2 ∆Lev_t+3 ∆Lev_t+4

(1) (2) (3) (4)

Skew_t −0.04^∗∗∗ −0.02^∗∗∗ −0.01^∗∗ −0.01 (−7.82) (−3.18) (−2.06) (−1.00)

Controls Yes Yes Yes Yes

SIC fixed effects No No No No

Firm fixed effects Yes Yes Yes Yes

Cluster adj. Yes Yes Yes Yes

Adjusted R² 0.30 0.35 0.38 0.44

Table 5.5 presents results for OLS regressions of the change in leverage (from t−1 tot+τ) on idiosyncratic skewness (Skew_t) and several control variables motivated by the literature. In line with Baker and Wurgler (2002) and Alti (2006), we lag control variables by one year as contemporaneous controls may be noisy. The notation and construction of leverage ratios and controls follows Sections 5.2.2 and 5.2.3, respectively.

For brevity, we only report results forSkew_t. In Panel A, we account for industry fixed effects, while Panel B controls for firm fixed effects. Stars indicate significance at the 10%

(*), 5% (**), and 1% (***) level andt-values (in parentheses) are based on cluster-adjusted standard errors. We cover a sample period from 1971 to 2020 and do not report the intercept.

therefore control for firm fixed effects in∆Lev_t+τ Not surprisingly, the persistence of idiosyncratic skewness is clearly reduced and comparable to Table 5.4. More precisely, both the economic and the statistical impact int+ 1 (Model 1) are in line with the short-term results andSkew_t turns insignificant int+ 4 (Model 4,t=−1.00).

Table 5.6:Long-Term Impact of Market Timing on Issues and Repurchases

Panel A: Issues and the Equity Share Dependent variable:

e_t+1/A_t e_t+2/A_t d_t+1/A_t d_t+2/A_t ES_t+1 ES_t+2

(1) (2) (3) (4) (5) (6)

Skew_t 0.04^∗∗∗ 0.01^∗ 0.01^∗∗ 0.01^∗∗∗ 0.06^∗ −0.05^∗ (5.34) (1.83) (2.45) (3.89) (1.78) (−1.90)

Controls Yes Yes Yes Yes Yes Yes

SIC fixed effects Yes Yes Yes Yes Yes Yes

Cluster adj. Yes Yes Yes Yes Yes Yes

Adjusted R² 0.27 0.24 0.02 0.02 0.06 0.05

Panel B: Repurchases Dependent variable:

−e_t+1/A_t −e_t+2/A_t −d_t+1/A_t −d_t+2/A_t

(1) (2) (3) (4)

Skew_t −0.0003 0.002 −0.01^∗∗ −0.01^∗∗∗

(−0.09) (0.90) (−2.10) (−3.44)

Controls Yes Yes Yes Yes

SIC fixed effects Yes Yes Yes Yes

Cluster adj. Yes Yes Yes Yes

Adjusted R² 0.002 0.004 0.03 0.02

Panel A of Table 5.6 presents results for OLS regressions of future equity (Models 1 and 2) and debt issues (Models 3 and 4), as well as the equity share in new issues (Models 5 and 6), on idiosyncratic skewness (Skew_t) and several control variables motivated by the literature. In line with Baker and Wurgler (2002) and Alti (2006), we lag control variables by one year as contemporaneous controls may be noisy. The notation and construction of controls follows Section 5.2.3. For brevity, we only report results for Skewt. In Panel B, we replace the dependent variables by equity repurchases (Models 1 and 2) and debt retirements (Models 3 and 4). We define substantial equity (e/At) and debt issues (d/A_t) as those exceeding 5% of total book assets. Substantial equity repurchases (−e/A_t) and debt retirements (−d/A_t) are characterized bynegativeequity and debt issues exceeding 1.25% and 5% of total book assets, respectively (Leary and Roberts, 2005). Stars indicate significance at the 10% (*), 5% (**), and 1% (***) level andt-values (in parentheses) are based on cluster-adjusted standard errors. We cover a sample period from 1971 to 2020 and do not report the intercept.

In order to identify whether the lack of persistence is driven by actual financing decisions, we now investigate the impact of idiosyncratic skew-ness on issues and repurchases in subsequent years. Table 5.6 presents results. In Panel A, we first focus on the issuance decision. In line with

Alti (2006), firms issue significantly more debt in both t+ 1 (Model 3, t= 2.45) andt+2 (Model 4,t= 3.89). However, int+1, firms also continue to issue more equity (Model 1,t= 5.34). While this result may seem coun-terintuitive, it could simply reflect the fact that planning for an SEO can take time until the next fiscal year (Alti and Sulaeman, 2012). Moreover, as shown by Green and Hwang (2012), idiosyncratic skewness predicts future return skewness. Consequently, firms may anticipate the demand for lottery-like stocks int+1 and issue more equity. As a result, the impact on the equity share remains positive int+ 1, but turns negative int+ 2. In both cases, however, statistical significance is rather low. In Panel B, we focus on repurchases. While idiosyncratic skewness is unrelated to future equity repurchases (Models 1 and 2), there is a negative impact on debt retirement in botht+ 1 (Model 3,t=−2.10) andt+ 2 (Model 4,t=−3.44).

Taken together, we find that firms immediately take action in debt mar-kets to rebalance away from the effects of market timing (Flannery and Rangan, 2006). However, firms also continue to issue equity, which likely explains why market timing effects int+ 1 (Table 5.4) remain similar to those reported in Table 5.2. In unreported results, we repeat this analysis based on logit regressions and find our conclusions to hold.³⁹

So far, our results point in the direction of a long-term validity of the trade-off theory, but do not provide a direct test. We therefore follow Flannery and Rangan (2006) and Huang and Ritter (2009) and run a partial adjustment analysis in order to estimate the speed of adjustment

39The statistical significance for equity issues increases, but is still exceeded by debt issues int+ 2. Moreover, the impact on equity repurchases remains statistically negative int+ 1, but is offset by a more negative impact on debt repurchases.

(SOA) to firm-specific leverage targets. For brevity, we limit our analysis to two approaches. First, we estimate the standard partial adjustment regression

Lev_i,t= (1−λ)Lev_i,t−1+λβX_i,t−1+_i,t, (5.2) where either book or market leverage in fiscal yeart (Lev_i,t) is regressed on leverage int−1 (Lev_i,t−1), idiosyncratic skewness, and the standard set of control variables (X_i,t−1).⁴⁰ _i,tdenotes residuals. In the following, we drop the firm indexi and define the speed of adjustment as one minus the coefficient estimate ofLev_t−1. Second, we follow Flannery and Rangan (2006) and control for firm-fixed effects (αi)

Levi,t = (1−λ)Levi,t−1+λαi+λβXi,t−1+i,t. (5.3) We include these unobserved characteristics to capture potential effects on the firm-specific target leverage that are intertemporally constant but cannot be measured directly. Moreover, according to Flannery and Rangan (2006) and Byoun (2008), firm fixed effects explain a large proportion of the cross-sectional variation in target leverage. We therefore base our conclusions on Equation (5.3). Table 5.7 presents results.

In Model (1), we estimate Equation (5.2) based on the level of book leverage. While the economic impact of Skew_t is similar to Table 5.2, statistical significance strongly increases (t =−11.10). The coefficient estimate forLev_t−1is 0.88, implying an annual adjustment of 12% and a half-life of deviations from target of about 5.4 years (log(0.5)/log(0.88)).

40These variables have been shown to predict firm-specific leverage ratios. Excluding idiosyncratic skewness does not affect our results.

Im Dokument Mispricing, momentum, and market timing - essays on stock market puzzles and capital structure decisions (Seite 193-200)