Determination of capital structure in India: a partial adjustment approach

Abstract

We investigate the role of adjustment costs and other firm-specific variables like tangibility, growth opportunity, size of the company, profitability, volatility, nondebt tax shields and uniqueness of the company in the determination of capital structure in the case of 793 Indian manufacturing companies for the period 1995–1996 to 2006–2007. A dynamic partial adjustment model, more specifically the Generalised Method of Moments (GMM) technique, is used to test the dynamics of capital structure. The results indicate that firms do have a target capital structure. The adjustment speed towards the target capital structure is reasonably high and it varies with the definition of leverage ratio. All these results are consistent with the tradeoff theory of corporate capital structure.