Agency Theory and the Market Timing Theory: Distinction and Resemblance
Keywords:
Agency Theory, Market Timing Theory, Current Ratio, Tangibility, Share Price Performance
Abstract
This study examines the preference for debt over equity issuance among companies, finding both positive and negative implications, and examining the financial and structural implications of financing decisions. Equity is defined as the company’s book value or the amount owed to owners upon asset liquidation, while debt refers to funds borrowed from external parties, which can be short-term (operational expenses) or long-term (growth investments). Results show that companies tend to issue debt as it reduces tax liabilities and increases post-tax cash flow available for dividends. However, a negative relationship is observed between liquidity, measured by the current ratio (CR), and the debt ratio, suggesting that higher liquidity levels lead companies to limited debt, possibly to manage agency costs arising from conflicts between creditors and owners, and between management and owners. Additionally, the negative relationship between company size and debt ratio indicates that larger companies, with higher profitability, tend to maintain lower debt levels. The findings also emphasize the importance of aligning management incentives with shareholder interests through compensation tied to profitability and stock price performance. Nonetheless, agency costs associated with debt management persist. This approach ensures that management is incentivized to act in the owners' best interest while minimizing agency costs. These findings highlight the complex dynamics of capital structure decisions and suggest that management strategies should focus on optimizing liquidity levels and aligning incentives to balance growth opportunities with shareholder value maximization. The study provides a comprehensive evaluation of how equity and debt financing preferences impact corporate financial strategies and behaviors.
Downloads
Download data is not yet available.
Metrics
Metrics Loading ...
References
1. Abdullah, A., & Ku Ismail, K. N. I. (2008). Disclosure of voluntary accounting ratios by Malaysian listed companies. Journal of Financial Reporting and Accounting, 6(1), pp. 1-27
2. Acaravci, S. K. (2015). The Determinants of Capital Structure: Evidence from the Turkish Manufacturing Sector. International Journal of Economics and Financial Issues, 5(1), pp. 158-171
3. Alipour, M., Mohammadi, M. F. S. and Derakhshan, H. (2015). Determinants of Capital Structure: An Empirical Study of Firms in Iran. International Journal of Law and Management, 57(1), pp. 53-83
4. Allini, A., Rakha, S., McMillan, D. G. and Caldarelli, A. (2018). Pecking Order and Market Timing Theory in Emerging Markets: The Case of Egyptian Firms. Research International Business and Finance, 44(c), pp. 297-308
5. Alzomaia, T. S. (2014). Capital structure determinants of publicly listed companies in Saudi Arabia. The International Journal of Business and Finance Research, 8(2), 53-67
6. Antoniou, A., Guney, Y., & Paudyal, K. (2008). The determinants of capital structure: capital market-oriented versus bank-oriented institutions. Journal of financial and quantitative analysis. 43(1), pp. 59-92
7. Baker, M. and Wurgler, J. (2002). Market Timing and Capital Structure. The Journal of Finance, 57(1), pp. 1-32
8. Bauer, P. (2004). Determinants of Capital Structure: Empirical Evidence from the Czech Republic. Czech Journal of Economics and Finance, 54(1-2), pp. 2-21
9. Berger, A. N., & Di Patti, E. B. (2006). Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry. Journal of Banking & Finance, 30(4), 1065-1102
10. Bhaird, C. M. A. and Lucey, B. (2010). Determinants of Capital Structure in Irish SMEs. Small Business Economics, 35(3), pp. 357-375
11. Chung, Y. P., Na, H. S., & Smith, R. (2013). How important is capital structure policy to firm survival?. Journal of Corporate Finance, 22, 83-103
12. Collis, J., & Hussey, R. (2013). Business research: A practical guide for undergraduate and postgraduate students. 4th ed. London: Macmillan International Higher Education
13. Cotei, C. and Farhat, J. (2009). The Trade-Off and the Pecking Order Theory: Are They Mutually Exclusive?. North American Journal of Finance and Banking Research, 3(3), pp. 1-16
14. Crutchley, C. E., & Hansen, R. S. (1989). A test of the agency theory of managerial ownership, corporate leverage, and corporate dividends. Financial Management, 18(4), pp. 36-46
15. Daskalakis, N. and Paillaki, M. (2008). Do Country or Firm Factors Explain Capital Structure? Evidence from SMEs in France and Greece. Applied Financial Economics, 18(2), pp. 87-97
16. Deesomsak, R., Paudyal, K., & Pescetto, G. (2004). The determinants of capital structure: evidence from the Asia Pacific region. Journal of multinational financial management, 14(4-5), pp. 387-405
17. Degryse, H., Doeij, P. D. and Kappert, P. (2012). The Impact of Firm and Industry Characteristics on Small Firm’s Capital Structure. Small Business Economics, 38(4), pp. 431-447
18. Deloof, M., & Van Overfelt, W. (2008). Were modern capital structure theories valid in Belgium before World War I?. Journal of Business Finance & Accounting, 35(3‐4), pp. 491-515
19. Dhole, S., Lobo, G J., Mishra, S. and Pal, A. M. (2015). Effects of the SEC’s XBRL Mandate on Financial Reporting Comparability. International Journal of Accounting Information System, 19(c), pp. 29-44
20. Dong, Y., Li, O. Z., Lin, Y. and Ni, C. (2016). Does Information-Processing Cost Affect Firm-Specific Information Acquisition? Evidence from XBRL Adoption. Journal of Financial and Quantitative Analysis, 51(2), pp. 435-462
21. Eriotis, N., Vasiliou, D. and Ventoura-Neokosmidi, Z. (2007). How Firm Characteristics Affect Capital Structure: An Empirical Study. Managerial Finance, 33(5), pp. 321-331
22. Feidakis, A. and Rovollis, A. (2007). Capital Structure Choice in European Union: Evidence from the Construction Industry. Applied Financial Economics, 17(12), pp. 989-1002
23. Frank, M. Z., & Goyal, V. K. (2003). Testing the pecking order theory of capital structure. Journal of financial economics, 67(2), 217-248
24. Golafshani, N. (2003). Understanding Reliability and Validity in Quantitative Research. The Qualitative Report, 8(4), pp. 597-607
25. Hsiao, C. (2007). Panel Data Analysis – Advantages and Challenges. Test, 16(1), pp. 1-22
26. Harmono, H. (2017). Testing of Pecking Order Theory Through the Relationship: Earnings, Capital Structure, Dividend Policy, and Firm’s Value. Jurnal Keuangan dan Perbankan (Journal of Finance and Banking), 16(3), pp. 358-371
27. Hoitash, R. and Hoitash, U. (2017). Measuring Accounting Reporting Complexity with XBRL. The Accounting Review, 93(1), pp. 259-287
28. Hox, J. J. and Boeije, H. R. (2005). Data Collection, Primary vs. Secondary. Encyclopedia of Social Management, 1(c), pp. 593-599
29. Huang, R. and Ritter, J. R. (2009). Testing the Market Timing Theory of Capital Structure and Estimating the Speed of Adjustment. Journal of Quantitative Analysis, 44(2), pp. 237-371
30. Jermias, J. (2008). The relative influence of competitive intensity and business strategy on the relationship between financial leverage and performance. The British Accounting Review, 40(1), pp. 71-86
31. Karadeniz, E., Kandir, S. Y., Iskenderoglu, O and Onal, Y. B. (2011). Firm Size and Capital Structure Decisions: Evidence from Turkish Lodging Companies. International Journal of Economics and Financial Issues, 1(1), pp. 1-11
32. Kim, H., & Gu, Z. (2005). A preliminary examination of determinants of CEO cash compensation in the US restaurant industry from an agency theory perspective. Journal of Hospitality & Tourism Research, 29(3), 341-355
33. Leland, H. E. (1994). Corporate Debt Value, Bond Covenants, and Optimal Capital Structure. The Journal of Finance, 49(4), pp. 1213-1252
34. Mateev, M., Poutziouris, P. and Ivanov, K. (2013). On the Determinants of SME Capital Structure in Central and Eastern Europe: A Dynamic Panel Analysis. Research in International Business and Finance, 27(1), pp. 28-51
35. Modugu, K. P. (2013). Capital Structure Decision: An Overview. Journal of Finance and Bank Management, 1(1), pp. 14-27
36. Myers, S. C. (1984). The Capital Structure Puzzle. The Journal of Finance, 39(3), pp. 575-592
37. Myers, S. C., & Rajan, R. G. (1998). The paradox of liquidity. The Quarterly Journal of Economics, 113(3), 733-771
38. Myers, S. C. (2001). Capital Structure. Journal of Economic Perspectives, 15(2), pp. 81-102
39. Nyberg, A. J., Fulmer, I. S., Gerhart, B., & Carpenter, M. A. (2010). Agency theory revisited: CEO return and shareholder interest alignment. Academy of Management Journal, 53(5), 1029-1049
40. Nasimi, R. N. (2016). Determinants of Capital Structure (An Empirical evidence, US). Global Journal of Management and Business Research, 16(4), 29-41
41. Palacim-Sanchez, M. J., Ramirez-Herrera, L. M. and Pietro, F. D. (2013). Capital Structure of SMEs In Spanish Regions. Small Business Economics, 41(2), pp. 503-519
42. Saunders, M., Lewis, P. and Thornhill, A. (2012). Research Methods for Business Students. 6th ed. Pearson Learning Solutions
43. Serghiescu, L., & Văidean, V. L. (2014). Determinant factors of the capital structure of a firm-an empirical analysis. Procedia Economics and Finance, 15, 1447-1457
44. Sheikh, N. A. and Wang, Z. (2011). Determinants of Capital Structure: An Empirical Study of Firms in Manufacturing Industry of Pakistan. Managerial Finance, 37(2), pp. 117-133
45. Sinha, P. C. and Ghosh, S. K. (2009). Theory of Market Timing and Asymmetric Information: Empirical Evidence with Dynamic Views. IUP Journal of Applied Finance, 15(4), pp. 5-27
46. Titman, S. and Wessels, R. (1988). The Determinants of Capital Structure Choice. The Journal of Finance, (43)1, pp. 1-19
47. Tong, G. and Green, C. J. (2004). Pecking Order or Trade-Off Hypothesis? Evidence on the Capital Structure of Chinese Companies. Applied Economics, 37(19), pp. 2179-2189
48. Youssef, A., & El-Ghonamie, A. (2015). Factors that determine capital structure in building material and construction listed firms: Egypt case. International Journal of Financial Research, 6(4), 46-59.
49. Zavertiaeva, M. and Nechaeva, L. (2017). Impact of Market Timing on the Capital Structure of Russian Companies. Journal of Economics and Business, 92(c), pp. 10-28
2. Acaravci, S. K. (2015). The Determinants of Capital Structure: Evidence from the Turkish Manufacturing Sector. International Journal of Economics and Financial Issues, 5(1), pp. 158-171
3. Alipour, M., Mohammadi, M. F. S. and Derakhshan, H. (2015). Determinants of Capital Structure: An Empirical Study of Firms in Iran. International Journal of Law and Management, 57(1), pp. 53-83
4. Allini, A., Rakha, S., McMillan, D. G. and Caldarelli, A. (2018). Pecking Order and Market Timing Theory in Emerging Markets: The Case of Egyptian Firms. Research International Business and Finance, 44(c), pp. 297-308
5. Alzomaia, T. S. (2014). Capital structure determinants of publicly listed companies in Saudi Arabia. The International Journal of Business and Finance Research, 8(2), 53-67
6. Antoniou, A., Guney, Y., & Paudyal, K. (2008). The determinants of capital structure: capital market-oriented versus bank-oriented institutions. Journal of financial and quantitative analysis. 43(1), pp. 59-92
7. Baker, M. and Wurgler, J. (2002). Market Timing and Capital Structure. The Journal of Finance, 57(1), pp. 1-32
8. Bauer, P. (2004). Determinants of Capital Structure: Empirical Evidence from the Czech Republic. Czech Journal of Economics and Finance, 54(1-2), pp. 2-21
9. Berger, A. N., & Di Patti, E. B. (2006). Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry. Journal of Banking & Finance, 30(4), 1065-1102
10. Bhaird, C. M. A. and Lucey, B. (2010). Determinants of Capital Structure in Irish SMEs. Small Business Economics, 35(3), pp. 357-375
11. Chung, Y. P., Na, H. S., & Smith, R. (2013). How important is capital structure policy to firm survival?. Journal of Corporate Finance, 22, 83-103
12. Collis, J., & Hussey, R. (2013). Business research: A practical guide for undergraduate and postgraduate students. 4th ed. London: Macmillan International Higher Education
13. Cotei, C. and Farhat, J. (2009). The Trade-Off and the Pecking Order Theory: Are They Mutually Exclusive?. North American Journal of Finance and Banking Research, 3(3), pp. 1-16
14. Crutchley, C. E., & Hansen, R. S. (1989). A test of the agency theory of managerial ownership, corporate leverage, and corporate dividends. Financial Management, 18(4), pp. 36-46
15. Daskalakis, N. and Paillaki, M. (2008). Do Country or Firm Factors Explain Capital Structure? Evidence from SMEs in France and Greece. Applied Financial Economics, 18(2), pp. 87-97
16. Deesomsak, R., Paudyal, K., & Pescetto, G. (2004). The determinants of capital structure: evidence from the Asia Pacific region. Journal of multinational financial management, 14(4-5), pp. 387-405
17. Degryse, H., Doeij, P. D. and Kappert, P. (2012). The Impact of Firm and Industry Characteristics on Small Firm’s Capital Structure. Small Business Economics, 38(4), pp. 431-447
18. Deloof, M., & Van Overfelt, W. (2008). Were modern capital structure theories valid in Belgium before World War I?. Journal of Business Finance & Accounting, 35(3‐4), pp. 491-515
19. Dhole, S., Lobo, G J., Mishra, S. and Pal, A. M. (2015). Effects of the SEC’s XBRL Mandate on Financial Reporting Comparability. International Journal of Accounting Information System, 19(c), pp. 29-44
20. Dong, Y., Li, O. Z., Lin, Y. and Ni, C. (2016). Does Information-Processing Cost Affect Firm-Specific Information Acquisition? Evidence from XBRL Adoption. Journal of Financial and Quantitative Analysis, 51(2), pp. 435-462
21. Eriotis, N., Vasiliou, D. and Ventoura-Neokosmidi, Z. (2007). How Firm Characteristics Affect Capital Structure: An Empirical Study. Managerial Finance, 33(5), pp. 321-331
22. Feidakis, A. and Rovollis, A. (2007). Capital Structure Choice in European Union: Evidence from the Construction Industry. Applied Financial Economics, 17(12), pp. 989-1002
23. Frank, M. Z., & Goyal, V. K. (2003). Testing the pecking order theory of capital structure. Journal of financial economics, 67(2), 217-248
24. Golafshani, N. (2003). Understanding Reliability and Validity in Quantitative Research. The Qualitative Report, 8(4), pp. 597-607
25. Hsiao, C. (2007). Panel Data Analysis – Advantages and Challenges. Test, 16(1), pp. 1-22
26. Harmono, H. (2017). Testing of Pecking Order Theory Through the Relationship: Earnings, Capital Structure, Dividend Policy, and Firm’s Value. Jurnal Keuangan dan Perbankan (Journal of Finance and Banking), 16(3), pp. 358-371
27. Hoitash, R. and Hoitash, U. (2017). Measuring Accounting Reporting Complexity with XBRL. The Accounting Review, 93(1), pp. 259-287
28. Hox, J. J. and Boeije, H. R. (2005). Data Collection, Primary vs. Secondary. Encyclopedia of Social Management, 1(c), pp. 593-599
29. Huang, R. and Ritter, J. R. (2009). Testing the Market Timing Theory of Capital Structure and Estimating the Speed of Adjustment. Journal of Quantitative Analysis, 44(2), pp. 237-371
30. Jermias, J. (2008). The relative influence of competitive intensity and business strategy on the relationship between financial leverage and performance. The British Accounting Review, 40(1), pp. 71-86
31. Karadeniz, E., Kandir, S. Y., Iskenderoglu, O and Onal, Y. B. (2011). Firm Size and Capital Structure Decisions: Evidence from Turkish Lodging Companies. International Journal of Economics and Financial Issues, 1(1), pp. 1-11
32. Kim, H., & Gu, Z. (2005). A preliminary examination of determinants of CEO cash compensation in the US restaurant industry from an agency theory perspective. Journal of Hospitality & Tourism Research, 29(3), 341-355
33. Leland, H. E. (1994). Corporate Debt Value, Bond Covenants, and Optimal Capital Structure. The Journal of Finance, 49(4), pp. 1213-1252
34. Mateev, M., Poutziouris, P. and Ivanov, K. (2013). On the Determinants of SME Capital Structure in Central and Eastern Europe: A Dynamic Panel Analysis. Research in International Business and Finance, 27(1), pp. 28-51
35. Modugu, K. P. (2013). Capital Structure Decision: An Overview. Journal of Finance and Bank Management, 1(1), pp. 14-27
36. Myers, S. C. (1984). The Capital Structure Puzzle. The Journal of Finance, 39(3), pp. 575-592
37. Myers, S. C., & Rajan, R. G. (1998). The paradox of liquidity. The Quarterly Journal of Economics, 113(3), 733-771
38. Myers, S. C. (2001). Capital Structure. Journal of Economic Perspectives, 15(2), pp. 81-102
39. Nyberg, A. J., Fulmer, I. S., Gerhart, B., & Carpenter, M. A. (2010). Agency theory revisited: CEO return and shareholder interest alignment. Academy of Management Journal, 53(5), 1029-1049
40. Nasimi, R. N. (2016). Determinants of Capital Structure (An Empirical evidence, US). Global Journal of Management and Business Research, 16(4), 29-41
41. Palacim-Sanchez, M. J., Ramirez-Herrera, L. M. and Pietro, F. D. (2013). Capital Structure of SMEs In Spanish Regions. Small Business Economics, 41(2), pp. 503-519
42. Saunders, M., Lewis, P. and Thornhill, A. (2012). Research Methods for Business Students. 6th ed. Pearson Learning Solutions
43. Serghiescu, L., & Văidean, V. L. (2014). Determinant factors of the capital structure of a firm-an empirical analysis. Procedia Economics and Finance, 15, 1447-1457
44. Sheikh, N. A. and Wang, Z. (2011). Determinants of Capital Structure: An Empirical Study of Firms in Manufacturing Industry of Pakistan. Managerial Finance, 37(2), pp. 117-133
45. Sinha, P. C. and Ghosh, S. K. (2009). Theory of Market Timing and Asymmetric Information: Empirical Evidence with Dynamic Views. IUP Journal of Applied Finance, 15(4), pp. 5-27
46. Titman, S. and Wessels, R. (1988). The Determinants of Capital Structure Choice. The Journal of Finance, (43)1, pp. 1-19
47. Tong, G. and Green, C. J. (2004). Pecking Order or Trade-Off Hypothesis? Evidence on the Capital Structure of Chinese Companies. Applied Economics, 37(19), pp. 2179-2189
48. Youssef, A., & El-Ghonamie, A. (2015). Factors that determine capital structure in building material and construction listed firms: Egypt case. International Journal of Financial Research, 6(4), 46-59.
49. Zavertiaeva, M. and Nechaeva, L. (2017). Impact of Market Timing on the Capital Structure of Russian Companies. Journal of Economics and Business, 92(c), pp. 10-28
Published
2025-04-08
How to Cite
Hamad, S. (2025). Agency Theory and the Market Timing Theory: Distinction and Resemblance. European Scientific Journal, ESJ, 40, 43. Retrieved from https://eujournal.org/index.php/esj/article/view/19345
Section
ESI Preprints
Copyright (c) 2025 Samer Hamad
This work is licensed under a Creative Commons Attribution 4.0 International License.
