Initial Public Offerings (IPOs) Capital Structure Choice

This paper examines the capital structure changes in an IPO event and the persistence ofany leverage changes ina subsequent yearsafter the IPO. The goal is to examine if managers attempt to time the market via an IPO event and issue equity while enjoying temporarily high marketvaluations. Moreover, in case of existence of market timing impact, the persistence of the capital structure change isresearched in years after the IPO. As last part, the impact of high use of preferred shares in pre-IPO year firms is examined in order to evaluate the sensitivity of new economy firms on market conditions. As a dependent variable the changes on book leverage is investigated in IPO year and the years following the IPO event. As independent variables five commonly used variables related to firm characteristics are used and one dummy variable related to the market conditions in the period of the IPO event. My resultsevidence the existence of market timing effect in IPO year andin years after the IPO, supporting the theory that firms’capitalstructure is highly related to market valuationsand is a significant determinant on the choice of debt or equity financing when external capital needs arise.