Introduction of market timing theory (capital structure) - Essay Example

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Introduction of market timing theory (capital structure)

Generally, it has been argued that managers often time the equity market to ensure maximum benefits (Guney and Hussain 1-2). According to Baker and Wugler (1-2) market timing is one of the major determinants used in examining an organisation’s capital structure, and how it uses its equity and debt. This means that companies do not give too much importance to whether they finance with equity or debt, but rather choose the most valued form of financing depending on the time and preference. However, critics allege that there is a need to have an inclusive market timing theory, which will help in clearly explaining why some organisations issue equity whereas others issue debt. In that case, they allege that the market time theory is incomplete. A good example of an organisation that has benefited from market timing is the Apple Company. For instance, research shows that in 2008, the company registered significant amounts of strengths despite the recession. The organisation was successful because its management did a tremendous job of ensuring that its stocks hold up during the difficult times; therefore, it was able to make enough money while other organisations were struggling. In 2007, Apple was named as the Business Week most successful and innovative firm. ...Show more

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Name Instructor Task Date Interpretation of Market Timing Theory The market timing theory analyses ways in which organisations make the decision to invest using debt or equity instruments. The theory was proposed by Baker and Wugler and is imperative in creating an understanding of the capital structure in the economy…
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