This paper analyzes the relation between growth opportunities and corporate borrowing using a panel data regression model, on a sample of 317 Indian firms covering the period 2004-2008. Isolating the components of growth in terms of growth of assets already-in-place and the present value of future growth opportunities has yielded statistically significant results that point to the possibility of misspecification of independent variables as a possible reason behind the earlier findings. Study findings conform to the theoretical explanation that firms with high market-to-book ratios have higher costs of financial distress and hence long-term borrowing and growth opportunities are inversely related even in the Indian context as it is elsewhere.

Several studies of Modigliani and Miller (MM) (1958) examined the reasons for economists' focussed attention on the appropriate choice of debt and equity. Consequently, numerous theories emerged based on agency costs, asymmetric information, product/input market interactions, corporate control consideration, and taxes. These theories, while validating the central message of MM that optimality of capital structure is an issue inextricably linked to taxes or some specifically identified market imperfections, however, failed to provide a definitive answer to optimal capital structure choice (that would maximize firm value) in the presence of market imperfections.

Barclay and Smith (1999) suggest that most competing theories of optimal capital structure are not mutually exclusive. Consequently, it may not be possible to reject any theory in favor of another, as there exists a possibility of more than one of them being right at the same time. Also noteworthy is the fact that many of the variables that affect capital structure choice are often difficult to measure; for example, the variable `growth' has been represented in empirical studies through growth of assets, growth in sales, market-to-book ratio or growth in capital employed. Which of them is the closest proxy for growth is a debatable issue, and selecting one among them as an independent variable in a regression model in terms of goodness-of-fit criteria might result in biasing the interpretation of the significance levels of the tests.

Applied Finance Journal, Indian Manufacturing Sector, Corporate Borrowings, Data Regression Model, Input Market Interactions, Liberalization, Financial Data, Panel Regression Model, Capital Markets, Tangible Assets, Financial Resources.