Impact of Market Timing on Corporate Capital Structure: Evidence from the UK IPO Market

Abstract

This study examines the impact of market timing on corporate capital structure throughout the analysis of the IPO market in the UK. It should be noted that due to its cyclical activity, the IPO market is considered as a natural place to detect market timing effects. In line with previous literature, this study considers the hot and cold classification as the equity timing measure. Market timers are identified as firms that go public in hot markets. Hot markets are characterised by periods of unusually high IPO volume and underpricing, usually on the back of the more favourable market conditions. On the contrary, cold markets are portrayed by opposite market conditions. The main findings of this study show that, in the offering year, hot-market firms issue more equity and experience a larger decrease in their leverage ratios in comparison with cold-market firms. However, right after going public, hot-market firms start to increase their leverage ratios at a higher pace than their cold-market counterparts. Five years following the IPO, the difference in the leverage ratio when compared to the pre-issue level becomes slightly higher for cold-market firms, suggesting that the changes on leverage stop being driven by the market timing factor. These findings are consistent with the view that the impact of market timing on capital structure is not persistent over time. Different econometric models were computed to test the research hypotheses. Also, the Huber-White estimator was applied to correct the error structure, ensuring that our findings were not biased by heteroscedasticity and error correlation. In addition, industry-fixed effects were included to control for cross-sectional heterogeneity.