Market Timing and Capital Structure


  • Malcolm Baker,

  • Jeffrey Wurgler

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    • Baker is from the Harvard University Graduate School of Business Administration. Wurgler is from the New York University Stern School of Business. We thank Arturo Bris, John Campbell, Paul Gompers, Roger Ibbotson, Andrew Roper, Geert Rouwenhorst, GeoffVerter, Ralph Walkling, participants of seminars at Columbia, Cornell, Duke, Harvard, INSEAD, MIT, Northwestern, NYU, Rutgers, Stanford, University of Chicago, University of North Carolina at Chapel Hill, University of Notre Dame, Wharton, and Yale, and especially Richard Green, Andrei Shleifer, Jeremy Stein, Ivo Welch, and an anonymous referee for helpful comments. We thank John Graham and Jay Ritter for data and Alok Kumar for research assistance. Baker gratefully acknowledges the financial support of the Division of Research of the Harvard Graduate School of Business Administration.


It is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity when their market values are low. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.