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On the Relation Between the Market-to-Book Ratio, Growth Opportunity, and Leverage Ratio


Long Chen


Cheung Kong Graduate School of Business

Xinlei Shelly Zhao


Office of the Currency Comptroller - Risk Analysis Division; Kent State University - Department of Finance

June 2006

AFA 2005 Philadelphia Meetings

Abstract:     
The negative relation between the market-to-book ratio and leverage ratio is one of the most widely documented empirical regularities in the capital structure literature. Most related studies take this negative relation as given and debate about its economic interpretation. We show that firms with higher market-to-book ratios face lower debt financing costs and borrow more. The relation between the market-to-book ratio and leverage ratio is not monotonic and is positive for most firms (more than 88% of COMPUSTAT firms and more than 95% of total market capitalization). The previously documented negative relation is driven by a subset of firms with high market-to-book ratios.

Number of Pages in PDF File: 19

Keywords: Capital structure, target leverage ratio, pecking order theory, market timing hypothesis, market-to-book ratio, growth opportunity

JEL Classification: G32

working papers series





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Date posted: March 5, 2004  

Suggested Citation

Chen, Long and Zhao, Xinlei Shelly, On the Relation Between the Market-to-Book Ratio, Growth Opportunity, and Leverage Ratio (June 2006). AFA 2005 Philadelphia Meetings. Available at SSRN: http://ssrn.com/abstract=666845 or http://dx.doi.org/10.2139/ssrn.666845

Contact Information

Long Chen (Contact Author)
Cheung Kong Graduate School of Business ( email )
Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China
Xinlei Zhao
Office of the Currency Comptroller - Risk Analysis Division ( email )
250 E Street, SW
Washington, DC 20219
United States
Kent State University - Department of Finance ( email )
College of Business Administration
P.O. Box 5190
Kent, OH 44242-0001
United States
330-672-1213 (Phone)
330-672-9806 (Fax)
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