Effect Of IPO Market Timing On Capital Structure

Static Trade-off theory and the Pecking Order theory have modified the MM theory by relaxing some of the assumptions,but they have not given up the assumption of Efficient Market.However,Bahavior Finance theory suggests that as the irrational investors and the limit of arbitrage,equity market is inefficient.Market timing theory of capital structure is developed and tested in Baker and Wurgler(2002).Their research results document that market timing affects capital structure in the short run,but also the effects on the capital structure are very persistent,so they suggest that capital structure is the cumulative outcome of past attempts to time the equity market.It's a new capital structure theory which is different from the Trade-off theory and the Pecking Order theory.It provides a new way to understand the capital structure.I use the method of Alti(2006),isolating timing attempts in a single major financing event,the initial public offering,by identifying market timers as firms that go public in hot issue markets.I use some empirical research methods such as independent samples T test and regression to study the effect of Chinese listed firms IPO market timing on capital structure.I use a sample of Chinese listed companies which do the IPO during 1994-2004 periods.I find that hot-market IPO firms issue substantially more equity,and lower their leverage ratios by more,than cold-market firms do.The market timing finance behavior exists in Chinese equity market.However,the timing attempts only affect the capital structure in a short time.By the empirical study,we come to our conclusion that in the practical management of leverage,the traditional factors together with the behavior factors affect the capital structure policy.