Abstract:
The market timing theory serves as the basis for this study, which aims to unravel the
persistent reaction to capital structure decisions. The rationale for conducting this
study stemmed from observing a gap in understanding the capital structure behaviour
of firms surrounding their initial public offerings and the progression of debt and
equity from that initial point. The study's sample, which covered the years 1992 to
2018, was created by using the IPO date of companies listed at the Colombo Stock
Exchange) in Sri Lanka. To measure market timing, the study utilized a variable called
external finance weighted average market-to-book ratio. This variable served as an
indicator of the firms' timing decisions in relation to the capital structure. A panel
regression model quantified the timing impact, showing an inverse association between
variables. However, the strength of the correlation was found to be less significant than
what market timing theory had predicted. Thus, it could not be proven that listed
companies consistently increase their equity by issuing new shares when the current
share price rises. These findings suggest that while market timing may have some
influence on the determination of the debt and equity portions in capital structure
decisions, other factors may also come into play. The study highlights the importance
of considering additional variables and factors that can impact capital structure
choices. It further emphasizes the significance of increasing equity on firm capital
structures and costs, and suggests that management can potentially adjust the capital
structure based on historical market-to-book ratios.
