Abstract
This empirical study examines the capital structure decisions of developing countries through a case study of Indian corporate sector by classifying the capital structure of 298 out of top 500 private sector manufacturing firms selected on the basis of sales turnover for the year 2004-2005 which covers a time span of eleven years commencing from 1995-96 to 2005-06 by cash flow coverage ratio, debt service ratio and current ratio. The study reveals that larger number of companies is distributed, for all the variables under study, in 0-100 percent capital structure range during 1995-96 (55 to 55.93 percent) and 2005-06 (62.68 to 63.29 percent), respectively. It is found that lesser number of companies is distributed, for all the variables under study, in 200-300 percent and more than 300 percent capital structure ranges during 1995-96 (3.93 to 4.06 percent each) and 2005-06 (7.32 to 7.39 percent and 3.48 to 3.52 percent), respectively. Overall, there is a shifting of companies from higher capital structure ranges towards lower capital structure ranges during the study period. Cash flow coverage ratio, debt-service ratio and current ratio are showing negative relationship with capital structure, implying less use of debt when these variables attain a higher value during 1995-96 and 2005-06, respectively.
Highlights
Capital structure decisions are significant managerial decisions which affect the shareholders the value of a firm
Under [10,11,12,13,14,15] percent cash flow coverage ratio, where highest number of companies is lying, it has been observed that 66.20 percent and 62.22 percent companies are in only one third capital structure ranges during 1995-96 and 2005-06, respectively
It has been observed that largest number of companies is in 0-100 percent capital structure range during 1995-96 and 2005-06
Summary
Capital structure decisions are significant managerial decisions which affect the shareholders the value of a firm . The question of the optimal capital structure of the business firm has attracted considerable attention by the economists in recent years.There has been an inconclusive debate on the issue of the relationship between financing decision and the valuation of firm Both theoretical and empirical researches yield contradictory results. Modigliani and Miller (MM) support the net operating income approach by providing logically consistent behavioral justifications in its favour They deny the existence of an optimum capital structure. A financial manager would consider a number of factors to set an optimal capital structure for a firm giving considerable weight to earning rate, collateral value of assets, age, cash flow coverage ratio, non debt tax shield, size (net sales), dividend payout ratio, debt service ratio, cost of borrowing, corporate tax rate, current ratio, growth rate, operating leverage and uniqueness (selling cost/sales) etc.
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