An empirical analysis of the market timing theory in Chinese listed companies

To avoid the debates on the multiple interpretations of market-to-book ratio, market-to-book ratio has been decomposed into market-to-value and value-to-book so that we could distinguish the growth opportunity from mis-pricing. In this paper, the residual income model is employed to calculate the intrinsic value to estimate the degree of mis-pricing by using a sample of Chinese listed companies from 1998 to 2003. Based on the degree of mis-pricing, an empirical support that equity market mis-pricing plays a significant role in decision making on the debt-equity choice is obtained. It verifies that the market timing theory may be applied in analysis of financing behavior of Chinese listed companies, but the long-lasting effect isn't significant.