Journal Press India^®

Author Details ( * ) denotes Corresponding author

India witnessed significant development in stock market in the post 1990s due to series of reform measures. As 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 (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. In this study we attempt to understand the role of market value in influencing the capital structure decisions of the manufacturing firms in India. We find that market value negatively influences the debt ratio both in short term and long term indicating the practice of market timing. Further, we find that negative impact does indeed come from changes in equity issues rather than changes in retained earnings or debt retirement.

Keywords

Capital structure; Market valuation; Market timing.

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