Determinants of Capital Structure: Panel Data Analysis of Indian Firms

Abstract

The purpose of this research is to identify determinants of capital structure in non-financial firms of a developing economy. Using 2,327 firm observations, we examine the determinants of debt-equity choice. The analysis was carried out through ordinary least squares, static panel data, and dynamic panel data (GMM methods) econometric models. The findings reveal that greater profitability, size, business risk, and liquidity causes Indian firms to take less debt whereas the presence of growth opportunities makes them accumulate more debt. The findings of the study are useful for managers in planning their financing decisions. The study points out that capital structure decisions are dynamic, and determinants of short-term debt greatly vary from those of long-term debt. The results offer support to the pecking order theory of capital structure.