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A Reinterpretation of the Relation between Market-to-book ratio and Corporate Borrowing

  • Majumdar, Raju

This paper develops an alternative interpretation of the observed inverse relation between market-to-book ratio and long term indebtedness based on the market timing theory of capital structure and provides empirical evidence to substantiate the same. Our findings suggest that in the presence of equity returns as an independent variable, market-to book ratio looses statistical significance in explaining incremental borrowing by the firm. Results in this paper reveal that long-term indebtedness is inversely related to market to book ratio in expansionary as well as contractionary phases of an economy. Consequently, the use of market-to-book ratio as an estimate of firm growth in regression models appears contestable.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 52398.

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Date of creation: 21 Dec 2013
Date of revision:
Handle: RePEc:pra:mprapa:52398
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  1. Guha-Khasnobis, Basudeb & N. Bhaduri, Saumitra, 2002. "Determinants of Capital Structure in India (1990-1998): A Dynamic Panel Data Approach," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 761-776.
  2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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  6. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  7. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
  8. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
  9. International Monetary Fund, 2005. "Monetary Policy and Corporate Behavior in India," IMF Working Papers 05/25, International Monetary Fund.
  10. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, 02.
  11. Marsh, Paul, 1982. " The Choice between Equity and Debt: An Empirical Study," Journal of Finance, American Finance Association, vol. 37(1), pages 121-44, March.
  12. Michael J. Barclay & Clifford W. Smith, 1999. "The Capital Structure Puzzle: Another Look At The Evidence," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(1), pages 8-20.
  13. Barclay, Michael J & Smith, Clifford W, Jr, 1995. " The Maturity Structure of Corporate Debt," Journal of Finance, American Finance Association, vol. 50(2), pages 609-31, June.
  14. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  15. A. A. Bevan & J. Danbolt, 2004. "Testing for inconsistencies in the estimation of UK capital structure determinants," Applied Financial Economics, Taylor & Francis Journals, vol. 14(1), pages 55-66.
  16. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
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