Dynamic adjustment of financial policy

Chapter 1 of this thesis uses a more robust market timing measure to test the relation between market timing and capital structure. A persistent impact of market timing on leverage is found. Moreover, the market timing measure is not a proxy for other firm characteristics, such as growth opportunities. This chapter also shows that equity issues at the IPO affect capital structure persistently, but equity issues in hot markets do not significantly reduce leverage more than those in cold markets. Though these results seem inconsistent with the static trade-off theory, we have to be cautious in rejecting the theory because the underlying capital structure will change after a firm goes public. Therefore, the firm may not need to rebalance away the effect of market timing IPO issues.;To circumvent the bias against the trade-off theory when examining the IPO firms, chapter 2 studies capital structure adjustment mechanisms of firms that experience substantial changes in leverage. Adjustments appear to be asymmetric among firms with large increases and those with large decreases in debt ratios. The different adjustments are not due to differences in leverage targets or industry distributions between the samples. Speeds of adjustment are found to be affected by market timing opportunities. The persistence of equity market timing opportunities slows some firms' rebalancing process.;Chapter 3 examines the relation between dividend smoothing and information asymmetry. Both the amount of the dividend payment and the extent of dividend smoothing are found to be negatively related to standard measures of information asymmetry. Firms with higher levels of asymmetric information are associated with lower dividend payments and also have a higher propensity to smooth their dividends. These results imply that a firm's information environment affects its dividend policy as indicated by Miller and Modigliani (1961).