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.