Market timing of corporate debt issuance: prediction or reaction?

Abstract

This article examines whether managers can successfully time the debt market when firms issue debt. The question arises from the debate about whether the empirical evidence that corporate debt issues are correlated to the debt market condition factors reveals the underlying market timing ability. The existence of a causal link between market condition variations and debt issuance is examined by distinguishing the predictions of future market variation from the reactions to past information. It is found that, in the sense of predicting the future market fluctuations, firms are generally unsuccessful. In contrast, their debt issue decisions are heavily driven by the reactions to prior information.

Is the cost of equity a mere function of leverage? The case of bond IPOs

“…Extensive research exists regarding the dynamics of bond issuance in general (these studies do not make any distinction between a bond IPO and a seasoned bond issue). For instance, Barry, Mann, Mihov, and Rodriguez (2008) find that firms tend to issue relatively more debt when interest rates are low, Zhou, Guo, Chen, and Yang (2012) show that firms' debt issue decisions are heavily influenced by the reactions to prior information and, Badoar and James (2016) provide evidence that firms' financial characteristics can have an impact on the bond terms. In terms of relatively recent research, Ghouma (2017) shows that the quality of corporate governance influences bond contract terms, and Gong, Xu, and Gong (2018) find that firms with higher corporate social responsibility disclosure quality incur a lower cost of bond issuance.…”

Trust‐Preferred Securities and Insurer Financing Decisions

“…Baker, Greenwood, and Wurgler () and Zhou et al () provide evidence that macroeconomic factors influence the time‐series pattern of corporate debt issues.…”