Capital Structure and Value of Advertising Expenditures: Evidence from an Emerging Market

Abstract

This paper documents a non-linear impact of capital structure on the value of advertising expenditures in India during the period between 2004 and 2016. India, one of the largest emerging markets, was chosen for study because it has become an important destination for international portfolio investment. These results show that advertising expenditures incurred by firms with moderate levels of debt are more valuable than advertising expenditures incurred by firms with low or high levels of debt. Our results are robust across various proxies of capital structure and across various sub-samples. This paper argues that moderate levels of debt are associated with low agency problems, while low and high levels of debt are synonymous with high agency problems. Differences in agency problems lead to advertising expenditures that have very different levels of value-relevance.