Theory of Market Timing and Asymmetric Information : Empirical Evidence with Dynamic Views

The present study hypothesizes that the firms which follow the Pecking Order Theory (POT) may consistently move towards the Market Timing Theory (MTT) with dynamic revisions. Here, we argue that the cost of asymmetric information related to the equity (or debt) financing reduces in the overvalued (or undervalued) equity market. In the absence of significant overvaluation or undervaluation, firms finance through internal equity. Hence, by applying a time varying "dynamic market timing measure", the study examines firms' market timing strategy to explain the behavior of the cost of asymmetric information. In the case of debt financing, the study confirms that the cost of asymmetric information involves dynamic revision in the short run, but the same disappears over the long run periods when firms tend to follow the MTT consistently. On external equity, the study results suggest that firms' successful market timing lacks persistency and does not happen consistently over the long run study period.