Which version of the equity market timing affects capital structure, perceived mispricing or adverse selection?

Baker and Wurgler (2002) define a new theory of capital structure. In this theory capital structure evolves as the cumulative outcome of past attempts to time the equity market. Baker and Wurgler extend market timing theory to long-term capital structure, but their results do not clearly distinguish between the two versions of market timing: perceived mispricing and adverse selection. The main purpose of this dissertation is to empirically identify the relative importance of these two explanations. First, I retest Baker and Wurgler's theory by using insider trading as an alternative to market-to-book ratio to measure equity market timing. I also formally test the adverse selection model of the equity market timing: first by using post-issuance performance, and then by using three measures of adverse selection. The first two measures use estimates of adverse information costs based on the bid and ask prices, and the third measure is based on the close-to-offer returns. Based on received theory, a dynamic adverse selection model implies that higher adverse information costs lead to higher leverage. On the other hand, a naïve adverse selection model implies that negative inside information leads to lower leverage. The results are consistent with the equity market timing theory of capital structure. The results also indicate that a naïve, as opposed to a dynamic, adverse selection model seems to be the best explanation as to why managers time equity issues

Compensation Vega, Deregulation, and Risk-Taking: Lessons from the US Banking Industry

banking , deregulation , executive compensation , stock options , vega , delta , risk-taking ,

Risk exposure during the global financial crisis: the case of Islamic banks

Purpose – The purpose of this paper is to examine the way Islamic financial institutions dealt with the recent financial problems in terms of risk management. Design/methodology/approach – In total, 27 Islamic banks and the same number of conventional banks selected from a wide range of countries around the world were analyzed. The capital ratios, based on the Basel Committee, are the primary tools used to analyze the riskiness of the Islamic and conventional banks. The focus on capital ratios is relevant in light of changes in banks' balance sheets due to significant write offs that caused a huge credit crunch in the western world. Capital ratios are considered as a reliable source in predicting potential bankruptcies. Findings – The paper shows that Islamic banks are maintaining better capital ratios than to their conventional counterparts. Originality/value – The paper presents a new approach to the comparative performance of Islamic and conventional banks in terms of risk management. The research design as well as the findings can be very useful to academicians and banking professionals alike.Banks, Capital, Economic depression, Financial risk, Islam