Examples Of Market Timing Theory

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Last but not least, market timing theory is the last theories of capital structure. Market timing is known as a short-term trading strategy where the investor will prognosticate the market movement in order to make the best trading decision to maximize their benefit or wealth. This theories means that the investor will treat market as a place that the buying and selling of stocks can be carried and they make their decision based on the predicted future market price movements. The prediction of market price movements may base on technical or fundamental analysis as main source of data. In other words, market timing is an investment tactic that emphasis more on the perspective of aggregate market compared to those that specific on certain financial…show more content…
This situation will enable the investor to make the correct and accurate financial decision that will benefict them. This means that, investors will have to investigate the time-series patterns before making external financial decision. Market timing theory states that most of the firm desire external securities as it provide low cost of equity and they don’t even mind they will have the obligation to pay the debt. Moreover, market timing theory stated that the movement of equity will based on condition of financial needs. This means that when the cost of equity is relatively low, the firm will issue new equity. Meanwhile, the firm will issue debt when the cost of equity is extremely high. At the same time, in conjunction with market timing theory, when the cost of equity is low, the firm may need to raise large amount of financing deficit with external equity. On the contrary, large amount of financing deficit with debt will be funded when the cost of equity is…show more content…
Nevertheless, large number of corporate executives prefer market timing theory rather the other two methods while making their financing decisions. Graham and Harvey (2001) stated that the situation of stock whether it is overvalued or undervalued is extremely importance for a firm when they want take consideration in issuing equity. Furthermore, there are difference between the market timing theory and pecking order theory. It difference is in term of market movement and efficiency. While investor is making their capital structure choices, market timing theory become the most importance theory to consider compare to the other two theories. This is due to the fact that the time-variation in the relative cost of equity has significant impact to the capital structure decision. Survey to investigate the time-series variation of financing decisions had been conducted to decide which theories is the best explanation of the time movements. Hence, it can be conclude that among these three theories, market timing theory is the best explanation for the co-movement of time as it indicate the fluctuations of debt and external equity while static tradeoff and pecking order theory do not provide sufficient evidence that can best describe the time-series variation. The reason that market timing theory put more emphasis on debt and external
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