Abstract
Existing empirical research on the determinants of capital structure has been largely restricted to the advanced countries like United States, Japan, France, U. K., Germany etc. The present paper makes an empirical attempt to study the determinants of capital structure of developing countries through a case of the Indian corporate sector by using a panel data approach. The present study, although an exploratory effort, is limited to 298 out of top 500 manufacturing firms selected on the basis of the turnover for the year 2004-2005 which covers the time span of eleven years commencing from 1995-96 to 2005-06. The results of the study demonstrate that that uniqueness and liquidity are the important determinants of capital structure of the Indian corporate sector during the period under study. It is also found that earning rate, cash flow coverage ratio, size (total assets), growth of assets, non-debt tax shield, dividend payout ratio and operating leverage are having a little influence on the capital structure of the Indian corporate sector during the period under study.
Highlights
The capital structure will be planned initially when a company is incorporated
Short-term borrowings are included in the debt or total borrowings because it is observed that short-term borrowings are being used as a long-term source of finance in the Indian contest Correlation, regression analysis and fixed effects approach to panel data are used to identify the determinants of capital structure of the Indian corporate sector
Cash flow coverage ratio and earning rate are negatively associated to the capital structure during the period under study
Summary
The financial manager has to deal with an existing capital structure. As the objective of a firm should be directed towards the maximization of the value of the firm, the capital structure or leverage decision should be examined from the point of view of its impact on the value of the firm. The financial manager should plan an optimum capital structure for his company. Leverage is generally measured by the ratio called debt-equity ratio This ratio indicates the relationship between the borrowed funds and owners’ funds in the capital structure of a company. Some authors argue that there is no relationship between capital structure and the value of a firm, whereas others hold that financial leverage has a positive effect on value of a firm.
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