Capital Structure in India and Its affect on Shareholder Value

Abstract

This paper examines the implications of capital structure of corporate entities in emerging markets. This study investigates relationship between the capital structure and firm performance. Capital structure describes how a corporation finances its assets. This structure is usually a combination of several sources of senior debt, mezzanine debt and equity. The predominance of capital structure studies mainly tapes the analysis of various determinants of leverage and their relationship with certain firm-level factors like size, liquidity, tangibility, profitability and so on. Capital Structure has huge impact on firm's performance since the value of firm is directly related to its performance. The better a firm performs, the higher its value is. More specifically, effect of leverage is significant on firm performance. Empirical research on investigating the impact of capital structures on firm performance has been largely restricted to the USA and other developed countries. The capital structure decision in developing countries such as India has not received much attention in the literature irrespective of the fact that fundamental economic differences exist among these counties impacting capital structure. Hence, the dearth of studies in the emerging markets provides the need for investigating capital structure choices and their impact on firm performance. India provides an ideal case for such investigation as the understanding the pattern and the main determinants of capital structures of companies and their impact on performance have largely been unexplored. Therefore, the main objective of this study is to examine the impact of capital structure on corporate performance using the emerging market of India as a case, understand how capital structure affects shareholder value and study the effect of capital structure on the profitability of the organization.