The present study hypothesizes that the firms which follow the Pecking Order Theory (POT) may consistently move towards the Market Timing Theory (MTT) with dynamic revisions. Here, we argue that the cost of asymmetric information related to the equity (or debt) financing reduces in the overvalued (or undervalued) equity market. In the absence of significant overvaluation or undervaluation, firms finance through internal equity. Hence, by applying a time varying "dynamic market timing measure", the study examines firms' market timing strategy to explain the behavior of the cost of asymmetric information. In the case of debt financing, the study confirms that the cost of asymmetric information involves dynamic revision in the short run, but the same disappears over the long run periods when firms tend to follow the MTT consistently. On external equity, the study results suggest that firms' successful market timing lacks persistency and does not happen consistently over the long run study period.

The theoretical propositions related to firms' capital structure decisions, which are at present drawing much of the researchers' attention in this field, are: (i) the Market Timing Theory (MTT) of Baker and Wurgler (2002), and (ii) the Pecking Order Theory (POT) of Myers and Majluf (1984). The propagators of the former theory state that firms' current capital structure changes are the cumulative outcome of the previous capital structure changes and such changes are made in response to equity overvaluation and undervaluation at the marketplace. The theory proposes that at equity overvaluation (or undervaluation), firms issue equity (or debt). On the contrary, the POT proposes that firms' financing decisions are ruled by the information asymmetry between managers and investors. The POT exposits that the cost of asymmetric information leads the firms through an ordered financingfirstly, internal equity capital; then, external debt capital; and finally, external equity capital.

These two propositions fundamentally assume that the firms enjoy superiority over the investors in the matter of possession of information. According to the MTT, firms persistently take initiatives to change the current capital structure, whereas the POT assumes that firms respond to the differential cost of asymmetric information of possible capital structure changes. Now, in an efficient capital market, investors cluster around homogeneously with respect to the information about the new issue. Thus, contrary to the POT, market efficiency is not a necessary condition in the market timing hypothesis.

Applied Finance Journal, Market Timing Theory, Pecking Order Theory, Internal Equity Capital, External Equity Capital, External Debt Capital, Information and Communications Technology Industry, Equity Markets, Market Timing Strategy, Non-mortgage Assets, Dynamic Market Timing Strategy, Asymmetric Information, Dynamic Market Timing Measure.