Shiller PE Ratio seems to fit well as a proxy to test the Market Tiiming Theory along with the Market-to-Book (M/B). Since the M/B measures the managers 'perception of the company in the market in isolation way, the Shiller PE Ratio measures the managers' perception of the general market.
The use of Shiller PE Ratio (Cyclically Adjusted Price to Earnings Ratio - CAPE) in papers on capitlal structure theory (trade-off, pecking order and market timing). Somebody knows?
Dear Researcher,
There are criticisms and appreciations for this metric. A clear understanding will help you in using this metric rightly. All the related literature use this particular metric in predicting the market. May be you can use it as a proxy but with a control variable to test the market timing theory
PFA links
Best
http://www.economist.com/blogs/buttonwood/2011/05/stockmarket_valuation
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2088140
http://www.fa-mag.com/news/jeremy-siegel--shiller-p-e-ratios--fatal-flaw--the-bullish-case-24815.html?section=5
http://www.marketoracle.co.uk/Article38514.html
http://aswathdamodaran.blogspot.in/2016/08/superman-and-stocks-it-not-cape-cape-it.html
Dear Lubza Nihar,
Thank you very much for your help.
It seems that there is no academic work that used the CAPE to test capital structure theories. I will carefully read the material you have sent me in order to justify using this metric correctly.
Best regards
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