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Impact of Firms’ Market Value on Capital Structure Decisions: Panel Data Evidence from Indian Manufacturing Firms

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Advances in Finance & Applied Economics

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Abstract

India witnessed a significant development in stock market in the post-1990s due to series of reform measures. As a result, firms are able to raise market-based capital which helped them to reduce their dependence on institution-based finance. Consequently, market valuation of the firm has become an important variable in corporate finance decisions. However, traditional theories of capital structure fail to offer unambiguous explanation on the impact of market value on capital structure. To bridge this lacuna in capital structure literature, Baker and Wrugler (J Financ 57(1):1–32 2002) propounded market timing theory which argues that firms’ time the market, that is, firms raise equity capital when market valuation is high and buy back when market valuation is lower and hence the current capital structure of the firm is the cumulative result of past attempts to time the equity market. This study attempted to understand the role of market value in influencing the capital structure decisions of the manufacturing firms in India. The study found that market value negatively influences the debt ratio both in short term and in long term, indicating the practice of market timing. Further, the study also shows that the negative impact does indeed come from changes equity issues rather than changes retained earnings or debt retirement.

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Notes

  1. 1.

    For example, Bangalore-based leading microfinance institute Ujjivan Financial Services Pvt. Ltd reported gross NPA rate of just 0.28% in FY 2016–2017 as against 13.37% in public sector banks.

  2. 2.

    Share of top four NPA accounts.

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Authors and Affiliations

  1. St. Aloysius Institute of Management and Information Technology, St. Aloysius College (Autonomous), Kotekar, Mangalore, 575022, Karnataka, India

    Dhananjaya Kadanda

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  1. Dhananjaya Kadanda
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Correspondence to Dhananjaya Kadanda .

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Editors and Affiliations

  1. National Institute of Public Finance and Policy (NIPFP), New Delhi, India

    N.R. Bhanumurthy

  2. Maharaja Sayajirao University of Baroda, Vadodara, India

    K. Shanmugan

  3. Marathwada Mitra Mandal’s Institute of Management Education and Research, Pune, India

    Shriram Nerlekar

  4. Marathwada Mitra Mandal’s Institute of Management Education and Research, Pune, India

    Sandeep Hegade

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Kadanda, D. (2018). Impact of Firms’ Market Value on Capital Structure Decisions: Panel Data Evidence from Indian Manufacturing Firms. In: Bhanumurthy, N., Shanmugan, K., Nerlekar, S., Hegade, S. (eds) Advances in Finance & Applied Economics. Springer, Singapore. https://doi.org/10.1007/978-981-13-1696-8_15

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  • DOI: https://doi.org/10.1007/978-981-13-1696-8_15

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