Management Science Letters

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1 Managemen Science Leers 2 ( Conens liss available a GrowingScience Managemen Science Leers homepage: An empirical sudy on marke iming heory: A case sudy of Tehran Sock Exchange Hadi Nasiri a* and Seyed Yousef Ahadi Serkani b a M.A. Suden, Deparmen of Accouning, School of Managemen,Tehran Norh Branch, Islamic Azad Universiy (IAU, Tehran, Iran b Assis.Prof. & Faculy Member, Deparmen of Accouning, Firoozkooh Branch, Islamic Azad Universiy (IAU, Iran A R T I C L E I N F O A B S T R A C T Aricle hisory: Received July 16, 2012 Received in Revised form Augus, 27, 2012 Acceped 20 Sepember 2012 Available online Sepember Keywords: Marke iming heory TSE Book value Financing One of he mos imporan issues in financing corporae is o find appropriae mehod o make a wise selecion beween geing loans and increasing he number of shares. There are differen heories for making appropriae financing mehods. The primary purpose of his paper is o invesigae his issue based on marke iming heory. The proposed model of his paper chooses selecive companies from Tehran Sock Exchange. The proposed model of his paper uses regression analysis on wo differen models. The primary purpose of he firs model given in his paper is o sudy he effec of marke iming heory. In his par of survey, we measure he effec of he raio of marke value o book value on he sources of financing firms hough increase in equiies. Based on he resuls, we can conclude ha as he raio of marke value o book value increases, firms end o increase heir equiy hough an increase o he number of shares. The firs hypohesis of his paper is confirmed. The second model is associaed wih he relaionship wih mean raio of marke value on weighed book value and Leverage and he resuls of his paper do no confirm such relaionship Growing Science Ld. All righs reserved. 1. Inroducion Financing plays essenial role on increasing company's capabiliies o develop heir business. There are lierally wo primary sources of financing a paricular firm, increasing he number of shares and absorbing loans. Of course, a combinaion of hese wo mehods is also possible bu he primary quesion arises when we look for he bes mehods. During he pas few years, here have been many sudies o sudy differen issues. Ellio e al. (2007 used an earnings-based fundamenal valuaion echnique o examine he effec of marke iming on he firm's policy of funding he financing defici. They criicized ha heir valuaion meric could provide a superior measure of equiy misevaluaion compared wih radiional model. * Corresponding auhor. Tel: addresses: h.nasiri1986@gmail.com (H. Nasiri 2012 Growing Science Ld. All righs reserved. doi: /j.msl

2 2864 The sudy also eliminaed he need o infer marke iming based on he acions of corporae insiders or oher indirec measures and repored a relaively srong posiive relaionship beween he degree in which a firm was overvalued and he proporion of he firm's financing defic which was funded wih equiy. They also repored ha overvaluaion in he 1990s led o equiy being increasingly popular over deb. Ellio e al. (2008, in oher sudy, examined he marke iming heory of capial srucure based on earnings-based valuaion echnique, which allows o separae equiy mispricing from growh opions and ime-varying adverse selecion. This could also help us preven he muliple inerpreaions of book-o-marke raio. They repored ha equiy marke mispricing played a subsanial role in he securiy choice decision. Mahajan and Tararoglu (2008 sudied he equiy marke iming hypohesis of capial srucure in major indusrialized (G-7 counries and repored ha leverage of firms was negaively associaed wih he hisorical marke-o-book raio in hose counries, bu his negaive relaionship did no seem o be aribued o equiy marke iming. They also repored ha here was no associaion beween equiy issues and marke-o-book raios a he ime of equiy financing decisions by Japanese corporaion. Anoniou e al. (2009 invesigaed wheher firms in he UK marke make full implemenaion of deb issuances for hedging purposes or wheher hey had oher consideraions. They repored ha firms choices of deb issues were primarily driven by deb marke condiions in an aemp o lower heir expendiures of capial raher han managing heir firm-specific ineres rae exposures. Buler e al. (2011 used a cross-secional echnique and repored ha he amoun of ne financing was more imporan han is composiion in explaining fuure sock reurns. They also repored ha measures of real invesmen were correlaed wih fuure reurns and measures of managerial marke iming were no. Hu e al. (2011 performed anoher empirical analysis on he relaionship beween iniial public offering waves and marke iming on he basis of produc marke compeiion in China. They invesigaed he opimal iming of going public afer comparing he advanage of going public and issuing cos. Jasemi e al. (2011 presened a model o do sock marke iming based on a supervised feed-forward neural nework and he echnical analysis of Japanese Candlesick. The nework was no rained based on he candlesick lines alone or in combinaion. 2. The proposed model The proposed sudy of his paper considers he following hree hypoheses, 1. When he raio of marke cap on book value increases, firms prefer o do financing hrough increasing he number of shares. 2. There is a posiive relaionship beween financing of firms and Tehran Sock Exchange index. 3. There is a reverse relaionship beween Leverage and mean weighed raio of marke cap on book value proporion o increase on he number of shares. The proposed sudy of his paper gahers he financial informaion of all lised firms raded in Tehran Sock Exchange over he period of The proposed sudy only focused on lised companies whose fiscal years sared from March o May of each year. The oher crierion associaed wih he proposed sudy of his paper is ha shares of he seleced firms mus have been acive during period of sudy and here mus be no change in heir fiscal calendar. The sudy did no include he shares of

3 S. Y. Ahadi Serkani and H. Nasiri / Managemen Science Leers 2 ( holdings, banks, insurance firms. Finally, he informaion of he firms mus be available for course of sudy. There are nine variables associaed wih he proposed model of his paper including raio of marke cap on book value, marke performance, weighed mean of marke value o book value adjused based on ne equiy, ne increase in equiy, Leverage raio, profiabiliy, ineres rae, capabiliy of morgaging asses and firm size. We firs presen deails of compuaions of hese formulas, 2.1. Ne increase in equiy A In his survey, he raio is calculaed as follows, e A ΔBE ΔRE = where is he ne increase of firm i in year, ΔBE i, is he change in book value of oal A equiies of firm i beween year -1 and, ΔRE i, is he change in accumulaed profi of firm i beween year -1 and and i, is he ne value of oal asses of firm i beween year -1 and Leverage raio Leverage i, Leverage raio is calculaed as, is he oal book value of all asses of firm i in year. i 2.3. Marke value on book value ( MTB i, TD Leverage = where TD i, is oal debs of firm i in year and In his research, he raio of marke value on book value is calculaed from divding book value of equiy by marke value a he end of each fiscal year Marke performance ( MARKET i, Marke performance is calculaed by measuring he growh on he marke index Mean raio of marke value on weighed book value ( MTB ewa, i This raio is calculaed as follows, eis MTB ewa i = * MTB is s= 0 e, r = 0 ir where e is is he increase in equaiy of firm i in year s, e ir is he increase in equaiy of firm i in year r, MTB is is he raio of marke value o book value of firm i in year s, and finally r and s are he number years of sudy up o year Profiabiliy (PROF Profiabiliy in his research is defined as follows

4 2866 PROF = EBIT where EBIT is earning before iners and ax of firm i in year, is oal asses of firm i a he end of year Ineres rae ( INTEREST i, In his survey, we consider he average rae of ineres announced by differen banks. 2.8.Capabiliy of asses for morgage ( NG, i Fixed asses represen he capabiliy of receiving loans from banks or any oher financial firms by morgaging hem and an increase in oal fixed asses could help reduce he risk of morgaging he asses and he raio is calculaed as follows, NG i, PPE + Inven = i, i, i,, where PPE is he ne value of fixed asses including all equipmens of firm i a he end of year, Inven is he ne invenory of firm i a he end of year, is book value of all asses of firm i a he end of year Size of firm (SIZE In his paper, we use naural logarihm of ne revenue a he end of each period as follows, SIZE = LN( S where S is he ne revenue of firm i a he end of year. 3. The proposed model The proposed model of his paper uses he following wo models = α + β1mtbi, + β2marketi, + β3profi, + β4inteseti, + ε, A Leverage = α + β MTB + β MARKET + β NG + β PROF + β SIZE + 1 ewa, i ε (1. (2 We firs presen deails of he daa used for he proposed sudy of his paper. Table 1 shows deails of some saisical observaions including he number of observaions (N, mean, sandard deviaion, min and max, skewness and sring. Table 1 Saisical observaions of he inpu daa N Mean Sd. dev. min max Skewness Sring (e/a Leverage MTB MARKET MTB ewa, i PROF INTEREST, i NG SIZE

5 S. Y. Ahadi Serkani and H. Nasiri / Managemen Science Leers 2 ( Based on he resuls of Table 1, we realize ha we can perform he regression analysis on boh models using panel daa. Table 2 shows some of he saisical observaions required o validae he resuls. Table 2 The summary of saisical observaions for he firs model Jarque-Bera Breusch-Pagan Durbin-Wason Ramsy 2 χ P-value F P-value D F P-value The resuls of regression echnique is as follows, A i, = MTB MARKET PROF INTESET + ε i, i, i, i, i, -suden ( (4.188 (5.060 (2.609 ( P-value ( (0.000 (0.000 ( ( F-value=2.324 P-value=0.000 (3 As we can observe from he resuls of regression echnique given in Eq. (3, all coefficiens are meaningful when he level of significance is five percen. The coefficiens of he firs hree variables are posiive, which is in accordance wih wha we expec and he coefficien of he las independen variable, Ineres, is negaive, which is, again, in accordance wih wha we expeced. The primary purpose of he firs model given in his paper is o sudy he effec of marke iming heory. In his par of survey, we measure he effec of he raio of marke value o book value on he sources of financing firms hough increase in equiies. Based on he resuls, we can conclude ha as he raio of marke value o book value increases, firms end o increase heir equiy hough an increase o he number of shares. The firs hypohesis of his paper is confirmed. The second hypohesis is, again, associaed wih marke iming heory and we look o see he effec of an increase on marke on financing firms hrough increase in he number of shares. The oher hypohesis of his paper is associaed wih he relaionship beween Leverage and mean of he raio of marke value on weighed book value proporion o equiy. Table 3 shows necessary saisical observaion obained for he second model saed in Eq. (2. Table 3 The summary of saisical observaions for he second model Jarque-Bera Breusch-Pagan Durbin-Wason Ramsy 2 χ P-value F P-value D F P-value The resuls of regression echnique is as follows, Leverage = MTB MARKET NG PROF SIZE + ε i, ewai, i, i, i, i, i, -suden (9.555 ( (2.239 ( ( ( P-value ( ( ( ( ( ( F-value=128.84,P-value=0.000 (4 As we can observe from he resuls, -suden value associaed wih MTBewa, i is no saisically meaningful and we canno rejec he null hypohesis. Therefore, here is no meaningful relaionship beween his variable and Leveraging he firm.

6 Conclusion In his paper, we have presened an empirical sudy on seleced firms lised on Tehran Sock Exchange. The proposed sudy of his paper sudied wheher here is any relaionship beween financing firm and oher issues. The proposed model of his paper has seleced companies from Tehran Sock Exchange based on four major crieria and examined differen hypoheses using regression analysis based on wo differen models. The primary purpose of he firs model given in his paper was o sudy he effec of marke iming heory. In his par of survey, we measured he effec of he raio of marke value o book value on he sources of financing firms hough increase in equiies. Based on he resuls, we have concluded ha as he raio of marke value o book value increases, firms end o increase heir equiy hough an increase o he number of shares. However, he resuls of his survey did no find any evidence o believe here was any relaionship beween he raio of marke value on weighed book value and Leverage. Acknowledgmen The auhors would like o hank he anonymous referees for heir commens on earlier version of his paper. References Anoniou, A., Zhao, H., & Zhou, B. (2009. Corporae deb issues and ineres rae risk managemen: Hedging or marke iming? Journal of Financial Markes, 12(3, Buler, A.W., Cornaggia, J., Grullon, G., & Weson, J.P. (2011. Corporae financing decisions, managerial marke iming, and real invesmen. Journal of Financial Economics, 101(3, Ellio, W.B., Koëer-Kan, J., & Warr, R.S. (2007. A valuaion-based es of marke iming. Journal of Corporae Finance, 13(1, Ellio, W.B., Koëer-Kan, J., & Warr, R.S. (2008. Marke iming and he deb equiy choice. Journal of Financial Inermediaion, 17(2, Hu, Z., Han, L., & Guo, X. (2011. An empirical analysis on he relaionship beween IPO waves and marke iming on he basis of produc marke compeiion in China. Procedia Environmenal Sciences, 11(A, Jasem M., Kimiagar A.M., & Memarian A. (2011. A modern neural nework model o do sock marke iming on he basis of he ancien invesmen echnique of Japanese Candlesick. Exper Sysems wih Applicaions, 38(4, Mahajan, A., & Tararoglu, S. (2008. Equiy marke iming and capial srucure: Inernaional evidence. Journal of Banking & Finance, 32(5,