Capital Structure and Traditional Trade-Off Theory Empirical Evidence of Select BSE Listed Companies

Capital Structure of a company represents combination of debt, equity and other sources of finance. Each component of capital structure has its own benefits and drawbacks. capital structure decision is one of the important decisions management has to make, there are two broad theories exist in the literature of finance to address the issue whether the value of a firm is affected by its capital structure or not. One is capital structure relevance theories and capital structure irrelevance theories. The former argues that value of the firm is affected by its capital structure whereas later argues that value of the firm is affected by its capital structure. Traditional trade-off theory of capital structure argues that value of the firm can increase through judicious mix of debt and equity up to certain level of debt. Most of the empirical studies on Traditional trade-off theory conducted in European countries no study has been conducted in Indian context (with special reference to BSE listed companies). The present study has employed multiple regression test to prove the postulated hypothesis of independent variables. The study finds that Market-to-Book equity ratio is positively and significantly related to leverage ratio and also the study sheds light on determinants of capital structure. Size of the firm (ln TA) and Net Income (NI) have expected sign and they are statistically significant and therefore, these emerge as the major determinants of the capital structure for the given sample firms. Though, market -to-Book (MBEQ), Dummy1 and, Dummy2, show expected sign and statistical significant results but we can not consider or generalize these factors as the impotant contributing determinants for firms capital structure.