Determinants of Capital Structure: A Study of Original Equipment Manufacturers from Indian Automobile Industry

Abstract

The main objective of this study is to identify the most significant determinants of capital structure of original equipment manufacturers from Indian Automobile Industry which are listed on the Bombay Stock Exchange for the period 2003-04 to 2016-17. To achieve the objectives of the study, hypotheses were formulated on the basis of review of various theories of capital structure viz. Pecking Order Theory, Static Trade-off Theory, etc. and empirical evidences on the subject. Descriptive statistics, analysis of correlation, and panel data regression including regression diagnostics have been used as statistical tools to identify the most significant determinants of capital structure of the sample companies. STATA software was used for the analysis of the data used in the present study. The results of the analysis carried out in the study revealed that the most significant determinants of capital structure of the sample companies during the selected time period were profitability of company, size of company, liquidity position of company, tangibility of assets, and operating cash flow, while non-debt tax shield, and effective tax rate did not show any significant relationship with the capital structure of the companies under consideration during the period of study. The study also observed evidences in support of Pecking Order Theory, and Free Cash Flow Theory, but no evidences were found in support of Static Trade-off Theory. This study provides useful insight pertaining to the financing behaviour of automobile manufacturing companies in India.