A Reinterpretation of the Relation between Market-to-book ratio and Corporate Borrowing
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.
|Date of creation:||21 Dec 2013|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
- International Monetary Fund, 2005. "Monetary Policy and Corporate Behavior in India," IMF Working Papers 05/25, International Monetary Fund.
- Marsh, Paul, 1982. " The Choice between Equity and Debt: An Empirical Study," Journal of Finance, American Finance Association, vol. 37(1), pages 121-144, March.
- Saumitra Bhaduri, 2002. "Determinants of corporate borrowing: Some evidence from the Indian corporate structure," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 26(2), pages 200-215, June.
- 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.
- Jeffrey A. Wurgler & Malcolm P. Baker, 2001.
"Market Timing and Capital Structure,"
Yale School of Management Working Papers
ysm181, Yale School of Management.
- 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.
- Barclay, Michael J & Smith, Clifford W, Jr, 1995. " The Maturity Structure of Corporate Debt," Journal of Finance, American Finance Association, vol. 50(2), pages 609-631, June.
- 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.
- 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.
- Ikenberry, David & Lakonishok, Josef & Vermaelen, Theo, 1995.
"Market underreaction to open market share repurchases,"
Journal of Financial Economics,
Elsevier, vol. 39(2-3), pages 181-208.
- David Ikenberry & Josef Lakonishok & Theo Vermaelen, 1994. "Market Underreaction to Open Market Share Repurchases," NBER Working Papers 4965, National Bureau of Economic Research, Inc.
- Taggart, Robert A, Jr, 1977. "A Model of Corporate Financing Decisions," Journal of Finance, American Finance Association, vol. 32(5), pages 1467-1484, December.
- 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.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:52398. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.