Abstract
The current study aims to examine the relationship between various identified determinants (Profitability, Tangibility, Growth Rate, Business Risk, Size and Non Debt tax shield) and its impact on financial leverage (CS) decisions of Capital goods, FMCG, Infrastructure and IT sector in Indian Stock market. In order to realise the stated objectives of the study the researchers have collected data from the published financial statements of quoted firms in the Indian stock market from the above mentioned sectors for a period of ten years (2006-2015). In the very first step,we tested the data by using multico1tinearity test and then we use linear multiple regression model to investigate the impact of chosen independent variables on CS (leverage) decisions in Indian capital market. Later, residual diagnostic CS, such as Serial correlation test, Heteroskedasticity Test, Normality and CUSUM test have been run to assess the strength of the constructed regression model. The results show that ER (Earnings), TA (Tangibility) and GR (Growth) were the major determinants in case of capital goods sector and ER (Earnings), TA (Tangibility), GR (Growth), Size and NDTS were the major factors for the FMCG sector. GR (Growth), BR (Business Risk) and Size for the Infrastructure sectors and ER (Earnings), BR (Business Risk) and Size were the major factors for the IT sector. The study revealed inconsistency in independent variables influencing the financial leverage component, though there is statistical support for the proposed determinants with respect to earnings and growth rate influencing the financial leverage.
Highlights
Capital Structure (CS) is the blend of long-term sources of funds used by a firm to finance its overall business operations and growth
Considering the importance of CS decision in real world and conflicting opinions given by the various theories, the current paper examines the relationship between various chosen determinants of CS and its impact on debt to equity ratio in Indian stock market
It is evident from the above table that the p value is more than 5% which means that the null hypothesis cannot be rejected
Summary
Capital Structure (CS) is the blend of long-term sources of funds used by a firm to finance its overall business operations and growth. A firm’s CSis a mixture of debt, common stock and preference shares. A firm with more borrowed funds (debt) than shareholder’s equity is often considered to be a highly leveraged and carries more risk to investors. Business firms raise debt because of the tax advantage associated with the debt funds. Tax laws allow interest payments as an allowable expenditure against revenues to arrive at taxable income. Through debt financing one can avoid dilution of holding. The CS is one of the most explored topics in finance domain. Academic research suggests a wide array of new models to explain the theory of CS and has tried to furnish the much required empirical support regarding practical applications of these suggested models in the actual business scenario
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