Equity Market Timing and Capital Structure: Evidence on Post-IPO Firms in Indonesia

Abstract

Purpose - The purpose of this research is to analyze and to evaluate the impacts of equity market timing on corporate capital structure policies in Indonesia by testing the historical values of stock. Design/methodology/approach - This study uses panel data of companies listed in Indonesian

Stock Exchange after IPO. The companies used as research object are 70 firms in the non- financial/non-banking sector with the observation period of 1997-2009. The period of

measurement is 5 years after IPO. Using past market value in which equity market timing is measured in two time measurements, i.e. yearly timing and long-term timing to prove its persistence. Findings - Consistent with equity market timing theory, the results suggest that firms tend to issue equities when their market valuations are relatively higher than their book values and their past market values are high. As a consequence, the firms become underleveraged or have their debts reduced in the short run. The results of long-term measurement on equity market timing do not appear to affect the firms’ capital structure decisions due to the firms’ relatively quick adjustments of optimal capital structures. The conclusion is that equity market timing is an important element in the short run but not in the long run. Research limitations/implications - The results of this study describe how firms in Indonesia take advantage of temporary market share fluctuations through equity market timing in their capital structure policies before ultimately making adjustments to the directions they are targeting. Practical implications – The use of equity market timing is more aimed at reducing the debt ratio and avoiding unfavorable conditions in the debt market, as well as taking advantage of the capital gains derived from the differences in their stock prices. this study also have practical implications on investment policies that need to consider the adaptation factor of the industrial environment when it comes to making capital structure decisions. Originality/value – This research is the first study that to analyze and to evaluate the impacts of equity market timing on corporate capital structure policies on post-IPO firms in Indonesia. This research is an empirical study which investigates the relevance of equity market timing considerations in the determination of debt-equity choices in capital structure.