Journal of Management Research

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Growth Opportunity and Capital Structure Dynamics: Evidence from Indian Manufacturing Companies


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1 Department of Humanities and Social Sciences Indian Institute of Technology Kharagpur- 721 302
     

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The objective of the paper is to investigate the role of historical 'market to book ratio' as a proxy for growth opportunity in determining the optimal capital structure of the Indian manufacturing companies during the period 1993-94 to 2007-08. This study specifies a partial adjustment model and uses the Generalized Method of Moments (GMM) technique to examine the role of historical market to book ratio, adjustment costs and other firm specific variable like size of the firm, profitability, non debt tax shield and tangibility for the determination of target capital structure. We find a robust relationship between the growth opportunity of the company and the capital structure dynamics. The adjustment speed towards the target has been varied between 12 to 39 percent across the various definitions of leverage. This study has the implications for the corporate managers in India to analyze the growth opportunity of the company and other firm specific variables like market to book ratio, size of the firm, profitability and tangibility while taking the appropriate financing decisions of the company.

Keywords

Leverage, Partial Adjustment Model, Generalized Method of Moments, External Financing Weighted Average of Market to Book Ratio, Equity Issue Weighted Average Market-to-book Ratio
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  • Growth Opportunity and Capital Structure Dynamics: Evidence from Indian Manufacturing Companies

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Authors

Sulagna Mukherjee
Department of Humanities and Social Sciences Indian Institute of Technology Kharagpur- 721 302
Jitendra Mahakud
Department of Humanities and Social Sciences Indian Institute of Technology Kharagpur- 721 302

Abstract


The objective of the paper is to investigate the role of historical 'market to book ratio' as a proxy for growth opportunity in determining the optimal capital structure of the Indian manufacturing companies during the period 1993-94 to 2007-08. This study specifies a partial adjustment model and uses the Generalized Method of Moments (GMM) technique to examine the role of historical market to book ratio, adjustment costs and other firm specific variable like size of the firm, profitability, non debt tax shield and tangibility for the determination of target capital structure. We find a robust relationship between the growth opportunity of the company and the capital structure dynamics. The adjustment speed towards the target has been varied between 12 to 39 percent across the various definitions of leverage. This study has the implications for the corporate managers in India to analyze the growth opportunity of the company and other firm specific variables like market to book ratio, size of the firm, profitability and tangibility while taking the appropriate financing decisions of the company.

Keywords


Leverage, Partial Adjustment Model, Generalized Method of Moments, External Financing Weighted Average of Market to Book Ratio, Equity Issue Weighted Average Market-to-book Ratio

References