Capital Intensity, Financial Leverage and Market Valuations in India:Evidence from a Panel of FMCG Firms

Capital intensity and firms’ valuation has been one of the most debatable topic of research for the past many years and keeps many researchers continue to investigate. This paper, covering the recent ten year financials from the annual reports of 15 leading FMCG firms in India`, proposes to link the capital intensity with firms’ profitability and capital gearing practices. The ultimate goal of the research is to investigate the effect of capital intensity on market valuation of firms measured by Tobin’s q. The panel regression procedure pursued in the study traces out the effect of capital intensity in the variations in financial leverage of firms. The debt overhangs in liabilities in the form of larger debt to equity structure, inversely affects the market valuation of FMCG firms in India. The research eventually challenges the classical capital structure theories explaining the positive correlations between capital gearing practices and market valuation of firms.