Multi Objective Capital Structure Modelling: A Goal Programming Approach

Abstract

Capital structure decisions have become complex in the changing business paradigm. The evaluation techniques used for capital structure decisions by the theories and models developed in the 1950s have lost their relevance due to changes over the years. Capital is still scarce despite financial liberalization and globalization. Business environment are exceedingly competitive. Stakeholders are awfully demanding. Survival and growth is restrained by competition. Decision maker's choice on capital structures is not restricted to debt and equity alone. Bankruptcy and distress risk go beyond on balance sheet items including off balance sheet exposures. In the light of this background the premise of a single objective for evaluating capital structure decision is questioned in this study. The study explores the multiple considerations followed by decision maker for capital structure decisions. The study investigates capital structure practices in the Indian industry through a sample of top 500 companies classified in 19 industries for a 10 year period (1998-2007) for 67 variables including the leverage variables. The spread of leverage ratio is also examined. The relationship of leverage ratios with market capitalization and EPS is also explored. Multi objective criteria for processing capital structure decisions is identified and justified based on the findings of the past researches and the empirical survey conducted as a part of this study. In the empirical survey, CFOs as respondents are investigated for their goals, priorities, motivations, constraints and practices for capital structure decision making. Goal Programming model was selected from different multi-objective optimization techniques. The model was found to be capable of providing satisficing solutions to multiple goals simultaneously by minimizing the deviation from the objective function after assuming that the decision maker is an optimist and does not attempt to satisfy all objectives fully. Goal Programming Model has been developed and illustrated for capital structure decisions under multiple objectives.