Determinants of Capital Structure: An Empirical Study of Selected Indian Manufacturing Companies

Abstract

Research Problem: To re-examine the issue of non-linearity in capital structure choices of firms through the application of the hitherto un-applied technique of ‘panel data unconditional quantile regression’ with a view to indirectly ascertain the applicability of Trade-off Theory, Agency Cost theory and Pecking Order Theory through the analysis of the predictions of these theories on the firm-specific determinants of capital structure of Indian manufacturing firms. Research Objectives: (A) To choose the appropriate panel data model from three mutually exclusive panel data models ( Pooled Ordinary Least Squares Model, Fixed Effects Model and Random Effects Model ) for analysing the impact of firm-specific determinants of capital structure on the mean of the variable measuring capital structure ( say, “V”) in respect of Indian manufacturing companies listed on the Bombay Stock Exchange (BSE), with a view to indirectly assess the applicability of Trade-Off Theory (TOT), Agency Cost Theory (ACT) and Pecking Order Theory (POT) for an average company with mean (average) level of leverage. (B) To apply ‘unconditional quantile regression technique’ on the chosen panel data model for analysing the differential impact ( that is, non-linear behaviour) of the firm-specific determinants of capital structure over the entire unconditional distribution of the variable “V” in respect of Indian manufacturing companies listed on the Bombay Stock Exchange ( BSE ), with a view to assess indirectly the applicability of Trade-Offff Theory (TOT) , Agency Cost Theory (ACT) and Pecking Order Theory (POT) at different quantiles of the unconditional distribution of V, that is, for representative companies having varying (for example, ‘very low’, ‘low’, ‘moderate’, ‘high’ or ‘very high’) levels of leverage. A representative company at a particular quantile of leverage represents a company with the corresponding level of leverage, for instance, a representative company at the 50th quantile represents a company with median (or moderate) level of leverage, or a representative company at the 10th quantile may be said to represent a company with very low level of leverage.