The Art of Timing: Unpacking the Market Timing's Long -Term Impact on Capital Structure : With Reference to Listed Companies in Colombo Stock Exchange

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.