Capital Structure and Corporate Financing Decisions: Theory, Evidence, and Practice

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ANSWERS TO CHAPTER DISCUSSION QUESTIONS 463

survey evidence shows that managers in market-oriented countries are less

concerned about financial flexibility and more concerned about equity dilution

compared to their peers in bank-based system countries. However, legal and

institutional factors are less important in explaining cross-country variation in

determinants of financing decisions compared to firm-specific factors, such as

firm size and ownership structure.

4. The survey evidence shows that both U.S. and European managers try to time

the market to minimize their financing costs. More than 40 percent of respond-

ing managers issue debt when interest rates are low or when the firm’s equity

is undervalued by the market. Both U.S. and European managers also consider

the amount of stock overvaluation or undervaluation and a rise in the firm’s

stock price as important factors in their equity issuance decision. Market timing

is also an important consideration in convertible issuance decision. The survey

evidence that managers use market timing for financing decisions is generally

consistent with empirical findings. Studies also document that managers select

the timing of financing decisions opportunistically to take advantage of tem-

porarily favorable market conditions and attractive stock prices. For example,

Kim and Weisbach (2008) show that firms around the world use market timing

in their initial public offering and ...