An Empirical Study on the Determinants of the Capital Structure of Listed Indian Firms

1. An Empirical Study on the Determinants of the Capital Structure of Listed Indian Firms Yohanes Kristiawan H 16668

2. TOPIC • This article presents empirical evidence on the determinants of the capital structure of non-financial firms in India based on firm specific data.

3. THEORY USED • Modigliani-Miller (MM) Theory • Static trade-off theory • Pecking order theory • The Tax Based Theory • The Signaling Theory • The Agency Theory

4. HYPOTHESIS • Tax effect and signaling effect play a role in financing decisions where as agency cost effect financing decision of big business houses and foreign firms • The size of the firm and business risk became significant factors influencing the capital structure during post-liberalization period.

5. VARIABLE USED • Measures of leverage (Dependent variable) • Book leverage • Market leverage • Explanatory variables • Non-debt tax shield (NDTS) • Tangibility • Profitability • Business risk • Growth opportunity • Growth • Size • Agency variables • big business group firms, foreign private firms, other firms

6. METHOD OF ANALYSIS • Regression model used to analyze the determinants of Indian firms’ capital structure.

7. RESULT OF THE ANALYSIS RESEACRH • Empirical Result • The book value based leverage (LBV) has decrease during post liberalization period whereas, market value based leverage (LMV) shows increase during the same period. • Non-dept tax shield (NDTS) has decreased during post liberalization period due to declined tax rates. • Profitability has also decreased due to increased competition due to liberalization and general recession in some major sectors.

8. There has been significant decrease in mean debt-equity ratio across the groups and industries. • Except growth rate and size all other explanatory variables have significant correlation with leverage during liberalization period

9. The interpretation of these result is presented below: • Tax and signaling effects on financing decisions • The overall results are consistent with the prediction of the tax based model and signaling model. The estimated coefficients of Non-debt tax shield, Cash operating profit, Market to book value ratio are consistently significant and have predicted signs across the equations. • Agency effects on financing decisions • Foreign investors are not adopting high leverage to discipline management. For big group firms these coefficients are negative and significant when leverage is measured in terms of market value. • Industry classification have no impact on the determinants of debt-equity choices.

10. CONCLUSIONS • Traditional factors that are affecting financing decisions are profitability, tangibility, taxes, and growth are all significant. • The size and risk measures are additional factors which influence capital structure decisions during post liberalization period. • Ownership pattern is significant when leverage is measured in terms of market value. • Leverage measured in terms of market value reveals better goodness of fit.