Impact of Capital Structure on Firm Value: Evidence from Indian Hospitality Industry

Divya Aggarwal,Purna Chandra Padhan

doi:10.4236/tel.2017.74067

Abstract

This study examines the effect of capital structure and firm quality on firm value of selected BSE listed Indian hospitality firms over a time frame of 2001-15. Variables including firm quality measured through Altman Z score, leverage, size, profitability, tangibility, growth, liquidity along with macro variables of growth in gross domestic product and inflation are taken into consideration for examining their impact on firm value. An empirical study has been carried out through panel data techniques by applying pooled OLS, fixed effects and random effects models. The findings of the study reveal a significant relationship of firm value with firm quality, leverage, liquidity, size and economic growth. The study shows that Modigliani miller theorem of capital structure irrelevance does not hold for Indian hospitality sector. It is of practical significance for hotel owners to reassess their capital structure to improve firm quality and firm’s market performance.

Highlights

There have been numerous empirical researches on various factors determining the relation between capital structure and firm value
This study examines the effect of capital structure and firm quality on firm value of selected Bombay stock exchange (BSE) listed Indian hospitality firms over a time frame of 2001-15
This study has aimed to contribute to the existing literature in various ways. It is one of the few studies which enhance the understanding of factors affecting firm value of hospitality sector in India over a large time frame of 15 years

Summary

Introduction

There have been numerous empirical researches on various factors determining the relation between capital structure and firm value. The debate on the impact of capital structure variables on firm value is ongoing in the field of corporate finance. It still hasn’t come to a conclusive result and remains a controversial issue. Few capital structure theories such as the theories of trade off, pecking order and market timing have been extensively studied and tested empirically in the literature, but have given mixed results. There is no unanimous view on the relevance of capital structure theories in general and especially on hospitality industries in particular.

Objectives

Methods

Conclusion