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What Drives Security Issuance Decisions: Market Timing, Pecking Order, or Both?


  • Ming Dong,

  • Igor Loncarski,

  • Jenke ter Horst,

  • Chris Veld

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    • Ming Dong is an Associate Professor of Finance at the Schulich School of Business, York University, Toronto in Canada. Igor Loncarski is an Assistant Professor of Finance at the Faculty of Economics of the University of Ljubljana in Ljubljana, Slovenia. Jenke ter Horst is a Professor of Finance at Tilburg University in Tilburg, The Netherlands. Chris Veld is a Professor of Finance at the University of Glasgow in Glasgow, United Kingdom.

  • The authors gratefully acknowledge the helpful comments and suggestions from Anas Aboulamer, Seth Armitage, Abe de Jong, Frans de Roon, Ron Giammarino, Luc Renneboog, Rosa Rodriguez, Dona Siregar, Patrick Verwijmeren, and participants at the Northern Finance Conference in Toronto (September 2007), the European Financial Management Conference in Milan (June 2008), the Scottish BAA Conference in Stirling (August 2009), the Midwest Finance Association in Las Vegas (February 2010), the Eastern Finance Association in Miami (April 2010), the Financial Management Association in New York (October 2010), and from seminar participants at Bristol University, Dalhousie University, Heriot-Watt University, La Trobe University, Tilburg University, University of Ljubljana, University of Strathclyde, and University of Waterloo. Special thanks go to an anonymous referee and to Bill Christie (Editor) for helpful comments and suggestions and to Wendy Jennings for copy-editing assistance. Ming Dong and Chris Veld gratefully recognize the financial support of the Social Sciences and Humanities Research Council of Canada.

  • Other important theories include the information asymmetry model of Myers and Majluf (1984) and the static trade-off theory. Myers and Majluf (1984) argue that external financing is costly because of information asymmetry between management and outside investors. Since equity involves a greater level of information asymmetry than debt, firms should prefer debt to equity. The static trade-off theory argues that firms trade off the advantages of debt, such as the deductibility of interest costs from corporate taxes, against the advantages of equity, such as lower expected bankruptcy costs. This paper only focuses on the pecking order and market timing theories.


We study market timing and pecking order in a sample of debt and equity issues and share repurchases of Canadian firms from 1998 to 2007. We find that only when firms are not financially constrained is there evidence that firms issue (repurchase) equity when their shares are overvalued (undervalued) and evidence that overvalued issuers earn lower postannouncement long-run returns. Similarly, we find that only when firms are not overvalued do they prefer debt to equity financing. These findings highlight an interaction between market timing and pecking order effects.

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