PDF Ebook Interest Rates and the Timing of Corporate Debt Issues
Survey evidence suggests that managers attempt to time financial markets in making their financing decisions. Using aggregate, macroeconomic funds flow data, Baker, Greenwood, and Wurgler (2003) (BGW) conclude that managers are successful in timing new issues of debt by decreasing the share of long term debt financing prior to high excess bond returns. We employ a sample of more than 14,000 new issues of corporate debt over the period 1970-2001 which allows us to examine issues that cannot be tested with macroeconomic data.
Contrary to BGW, we find managers to be generally unsuccessful at timing debt issues. We find that managers do not issue more debt prior to increases in interest rates. Future interest rates do not increase in the amount of debt issued or the effective maturity of debt issued, and future excess bond returns are not significantly higher when smaller amounts of long-term debt are issued. Furthermore, for the separate periods 1970-1981 and 1982-2001 there is no evidence of timing ability based on debt maturity or any other characteristics of debt that we examine.
When net debt issues are used rather than gross debt issues, BGW’s results on debt timing disappear even with the flow of funds data that they employed. However, consistent with recent survey results, we find strong evidence of choices by management to issue debt when interest rates are attractive in relation to historical rates. The level of interest rates relative to historical levels strongly affects debt issuance, debt maturity choices, call features, and put features of debt. Our results hold for all issues, whether or not refinancing transactions are included.
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PDF Ebook Interest Rates and the Timing of Corporate Debt Issues
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