The Impact of Market Timing on European Firms’ Capital Structure: RLBOs vs. IPOs

Abstract

Our study compares the impact of market timing on the capital structure of reverse leveraged buyouts (RLBOs) and initial public offerings (IPOs). Our sample is made up of 210 RLBOs and 210 public companies listed between 1995 and 2015 and linked by size (turnover) and industry (based on the first two digits of the SIC code). Our results show that the impact of market timing measures on capital structure is different between RLBOs and public companies. In accordance with Baker and Wurgler (2002) and others, these measures have a negative and significant effect on the capital structure of the two types of companies. This significance is persistent ten years after the IPO for public companies and only three years after the IPO for RLBOs. RLBOs rebalance the market timing effect on their capital structures much more quickly and therefore move toward the target debt ratio more quickly than their counterparts. These results challenge the robustness and generality of Baker and Wurgler’s (2002) market timing theory. The capital structure of RLBOs seems to be better explained by the characteristic variables of companies suggested by the theory of trade-off.