Asian Finance Association Conference

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Research Title: 
Timing or Targeting:The Asymmetric Motives of Capital Structure Decisions
Islam Abdeljawad
Fauzias Mat Nor
Timing or Targeting: The Asymmetric Motives of Capital Structure Decisions456.91 KB
Research Abstract: 

This study investigates how the timing behavior and the adjustment towards the target of  capital structure interact in the capital structure decisions. Past literature finds that both  timing and targeting are significant in determining the leverage ratio which is inconsistent  with any standalone framework. This study argues that the coexistence of both timing and  targeting is possible. The preference of the firm for timing behavior or targeting behavior  depends on the cost of deviation from the target. Since the cost of deviation from the  target is likely to be asymmetric between overleveraged and underleveraged firms, the direction of the deviation from the target leverage is expected to alter the preference  toward timing or targeting in the capital structure decision. Using GMM-system  estimators with the Malaysian data for the period of 1992-2009, this study finds that  Malaysian firms, on average, adjust their leverage at a slow speed of 12.7% annually increased to 14.2% when the timing variable is accounted for. Moreover, the speed of  adjustment is found to be significantly higher and the timing role is lower for  overleveraged firms compared with underleveraged firms. Overleveraged firms seem to  find less flexibility to time the market as more pressure is exerted on them to return to the  target regardless the timing opportunities because of the higher costs of deviation from  the target leverage. Underleveraged firms place lower priority to rebalance toward the  target compared with overleveraged firms as the costs of being underleveraged is lower  and hence, they have more flexibility to time the market. The findings of this study  support that tradeoff theory and timing theory are not mutually exclusive. Firms consider  both targeting and timing in their financing decisions but the preference of one motive over the other is conditional on the cost of the deviation from the target.