Journal of Management Research

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

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


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

   Subscribe/Renew Journal


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
User
Notifications

  • Alti, A. (2006), How Persistent is the Impact of Market Timing on Capital Structure, Journal of Finance, 61: 1681-1710.

  • Arellano, M. and Bond S. (1991), Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations, The Review of Economics Studies, 58 : 277-297.

  • Baker, M. and Wurgler, J. (2002), Market Timing and Capital Structure, Journal of Finance, 57: 1–32.

  • Chang, X. and Dasgupta, S. (2008), Target Behaviour and Financing: How Conclusive is the Evidence? Journal of Finance, forth coming.

  • Chen, L. and Zhao, S. X. (2006), On the Relation between Market-to-Book Ratio, Growth Opportunity, and Leverage Ratio, Finance Research Letters, 3: 253–266.

  • Elliott, W. B., Koeter-Kant, J. and Warr, R. (2007), A Valuation Based Test of Market Timing, Journal of Corporate Finance, 13:112- 128.

  • Fischer, E., Heinkel, R., and Zechner, J., (1989). Dynamic Capital Structure Choice: Theory and Tests. Journal of Finance, 44: 19–40.

  • Flannery, M. and Rangan, K. (2006), Partial Adjustment towards Target Capital Structures, Journal of Financial Economics, 79:459 - 506.

  • Hovakimian, A. (2006), Are Observed Capital Structures Determined by Equity Market Timing, Journal of Financial and Quantitative Analysis, 41: 221-243.

  • Hovakimian, A., Opler, T. and Titman, S. (2001), The Debt-Equity Choice, Journal of Financial and Quantitative Analysis, 36: 1–24.

  • Hovakimian, A., Hovakimian, G., and Tehranian, H., (2004). Determinants of Target Capital Structure: The Case of Dual Debt and Equity Issues. Journal of Financial Economics 71: 517–540.

  • Huang, R. and Ritter, J. (2009), Testing Theories of Capital Structure and Estimating the Speed of Adjustment, Journal of Financial and Quantitative Analysis, 44: 237-271.

  • Kayhan, A. and Titman, S. (2007), Firms' Histories and their Capital Structure”, Journal of Financial Economics, 83: 1-32. Leary, M. and Roberts, M. (2005), Do Firms Rebalance their Capital Structure? Journal of Finance, 60: 2575-2619.

  • Liu, L. X. (2009), Historical Market-to-Book in a Partial Adjustment Model of Leverage, Journal of Corporate Finance, 15: 602-612.

  • Mahajan, A. and Tartaroglu, S. (2008), Equity Market Timing and Capital Structure: International Evidence, Journal of Banking and Finance, 32: 754-766.

  • Marsh, P. (1982), The Choice between Equity and Debt: an Empirical Study, Journal of Finance, 37: 121-144.

  • Modigliani, F. and Miller, M. (1958), The Cost of Capital, Corporation Finance, and the Theory of Investment, American Economic Review, 48: 655-669.

  • Myers, S. and Majluf, N. (1984), Corporate Financing and Investment Decisions when Firms have Information that Investors do not have, Journal of Financial Economics, 13: 187-224.

  • Rajan, R. G. and. Zingales, L. (1995), What do we Know about Capital Structure? Some Evidence from International Data, Journal of Finance, 50:1421-1460.

  • Taggart, R. A. (1977), A Model of Corporate Financing Decisions, Journal of Finance, 32: 1467-1484.

  • Xu, Z. (2009), The Impact of Market Timing on Canadian and US Firms’ capital structure, Working Paper, Bank of Canada.


Abstract Views: 385

PDF Views: 1




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

Abstract Views: 385  |  PDF Views: 1

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