Effect of determinants on financial leverage in Indian steel industry: A study on capital structure

Abstract

AbstractBecause India is neither a developed country nor its steel companies are financially self‐sufficient, they are bound to depend on the external capital, resulting the decision to be taken on the leverage ratio as even more crucial. India being the top exporter of iron ores has the potential to be counted as one of the top exporters of steel if the steel companies follow optimal capital structure. Thus, the leverage ratio needs thorough investigation in order to decide the optimal capital structure. Although there have been some attempts, they are not extensive. The objective of this study is to empirically investigate the present capital structure of Indian steel industry from years 2010 until 2017 and the determinants of capital structure and how these determinants correlate with financial leverage. The research objectives are (1) to identify the significant determinants that affect the capital structure and (2) to conduct an extensive and empirical research in order to estimate the correlations of the determinants with the financial leverage. Seven key determinants have been found: They are profitability, asset structure, size, growth opportunities, non‐debt tax shield, liquidity, and risk. The profitability is found to be highly correlated with the debt ratio as was expected and reported in previous studies. The correlations among the determinants such as asset structure, size, and non‐debt tax shield are statistically significant. Profitability and liquidity carry positive relationship with debt ratio, although there is a negative relationship between debt ratio and asset structure.