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.
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Notes
Some of the agency problems that may arise at high levels of debt are those related to under-investment and over-investment. Debt covenants become more severe at high levels of debt, providing stricter monitoring. However, they also introduce agency costs in the form of lost flexibility, inability to invest in certain projects, and restrictions in types of financing (Jerzemowska 2006).
Capital structure variables are measured by using the book values.
Robust regressions were used for all estimations. Robust regression produces White-corrected robust variance estimates (to control for heteroskedasticity). Moreover, the Shapiro-Francia test showed that the residuals from all models were normally distributed.
Small firms are those with below median total assets. Large firms are those with above median total assets. 2007, 2008, and 2009 were defined as the crisis period.
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Pashayev, Z., Farooq, O. Capital Structure and Value of Advertising Expenditures: Evidence from an Emerging Market. Int Adv Econ Res 25, 461–468 (2019). https://doi.org/10.1007/s11294-019-09752-5
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DOI: https://doi.org/10.1007/s11294-019-09752-5