Market Timing and Capital Structure: Evidence from Shenzhen Market in China

This paper investigates the market timing hypothesis of capital structure for listed firms in Shenzhen over the 2002- 2007 period. We use yearly timing (YT) in Kayhan and Titman(2007)´s study as a measure of market timing which separates growth opportunities from historical market-to-book ratio (external finance weighted historical market-to-book ratio, EFWAMB). We find capital structure is inversely related to yearly timing, but not significant. The result shows that market timing in Shenzhen market doesn´t have a persistent impact on the capital structure. This is inconsistent with Baker and Wurgler(2002)´s conclusion that market timing has a long-lasting effect on capital structure but consistent with Kayhan and Titman(2007) and Bie and Haan(2007)´s conclusions. The reason may be that there is market friction in time and approach aspects while China firms make use of market timing.