Market Valuation and Capital Structure Decisions: Evidence from Indian Public Limited Manufacturing Firms

Abstract

The study attempts to examine the impact of market valuation on capital structure decision of Indian public limited manufacturing firms. Particularly, it attempts to answer whether the market value affects firms leverage through equity issues and whether market valuation has a long term impact on firms’ leverage ratio. The findings show that there is a significant negative relationship between the change in debt ratio and MB ratio which suggests that a firm’s debt ratio decreases as market value increases. This indicates that firms time the market, i.e., they prefer to issue equity when the market value is high. Also, the study shows that the negative impact of market value on debt ratio is indeed traced to changes in equity issues than changes in retained earnings or debt retirement. Further, the result shows that market value has a persistent effect on capital structure, which is consistent with the prediction of the market timing theory.