Does market timing persistently affect capital structure? Evidence from stock market liberalization

• Using liberalization, we test the market timing theory of capital structure.
• Liberalization reduces the cost-of-equity capital for Taiwan-listed firms.
• Post-liberalization IPO’s going-public decision is consistent with market timing.
• Capital structure adjustment speed is faster for the post-liberalization period.
• Liberalization-induced equity market timing fails to influence capital structure.

Utilizing stock-market liberalization, we test whether managers exploit favorable market conditions to time their firms' IPOs, and whether or not the timing will have a persistent, negative impact on leverage. Using a sample of 235 Taiwanese IPOs over the 10-year period surrounding the first liberalization in the Taiwan stock market, a high-volatility, high-turnover, high-individual-trading emerging market, we first show that liberalization substantially reduces the cost-of-equity capital. We then provide evidence that the going-public decision for post-liberalization IPOs is consistent with equity market timing, but that it fails to influence the debt ratio.