Market Timing Theory of Capital Structure : A Panel Data Regression Study of Swedish Real Estate Firms

Sammanfattning: In 2002, Baker and Wurgler posited that capital structure is the cumulative outcome of past attempts to time the equity market. Due to this theory´s recent introduction it has not been subjected to the same comprehensive testing as other financing theories. Most importantly, this theory lacks extensive industry and country specific testing that is required to truly understand its explanatory power. Thus, the purpose of this thesis is to evaluate the applicability of the market timing theory on a country and industry specific level. Given these constraints, the study measured the market timing effects on Swedish real estate firms by performing a panel data regression with yearly financial data from 1991 through 2021. In addition, due to the time-varying nature of capital structure, the data was further divided into three sub periods. First, the study controls for short-term effects by regressing market-to-book with three components of leverage. The results suggest a positive relationship between equity issues and market-to-book values, indicating support for short-term market timing effects. Next, the study implements the external financed weighted-average market-to-book variable to measure if the market timing effects are indeed persistent over the long run. Opposing the market timing theory, the results do not find any support for long-term effects. Instead, the findings imply that firms likely rebalance their capital structure shortly after equity market timing attempts.