Empirical Tests for Market Timing Theory of Capital Structure : The Case of IPOs in Indonesia Stock Exchange

This study aims to examine the validity of Market Timing Theory (MTT) in the Indonesian context. The essence of MTT is when the market price of a company's stock is overvalued, the firms will take equity financing and debt financing for undervalued condition. The motivations of this study are to test the dispute level of pros and cons of empirical studies about MTT especially on the issue of persistency. The empirical model from MTT of previous researcher has a specific uniqueness i.e. the negative relation between leverage and market to book ratio. That negative relationship is controlled by several factors such as log total asset, earnings after taxes (EAT) and fixed asset. EAT and fixed asset are scaled by total asset. The other specific uniqueness is sample of IPO firms. With IPO firms, we can indicate the effect of overvalued or undervalued condition through market to book ratio (M/B). M/B will reflect the market respond regarding to equity issuing decision of the firm. The result of this study supports the hypothesis of MTT in Indonesia Stock Exchange (IDX) with the main finding i.e. market to book ratio has the negative impact to market leverage. While the relevant factor for supporting the hypothesis of MTT is EAT. It suggests that in the context of MTT, IPO firms will experience increasing profits so that the proportion of the use of debt will decrease