The Determinants of Capital Structure of Indian Industries:An Empirical Investigation

The capital structure of a firm consists of debt and equity and the firms try to maintain appropriate financing mix to attain target capital structure. l\/lodern capital structure theory stems from influential finance article in 1958 by Nobel laureates Professor Franco Modigliani and Merton H. Miller Many theories hence developed over the years emphasizing on the determinants of capital structure decisions. The trade-off theory and signaling theory in particular play a crucial role in identifying and testing the various properties of the leverage decisions. This paper briefly tries to evaluate whether some a priori assumed macroeconomic determinants can be related to the leverage. For this purpose, an empirical study was undertaken on Indian industries covering 151 selected firms categorised 13 industrial sector Following the developments in the contemporaneous estimation techniques that allow us to use time series and cross section data concurrently the panel data methodology has been applied to the actual data to compute the leverage ratios for each firm within the time period 2003-04 to2007-08 to determine to what extent the macroeconomic determinants affect the leverage ratios under various groupings such as, size, growth opportunities, profitability liquidity and dividend payout A major findings on the attribute of various explanatory variable used in the regression model is that the variables like liquidity and growth in terms of performance of the firm have significant influence on debt-equity ratio. In other words, sustainable growth along with credit worthiness of the firm influences debt-equity ratio i.e., degree of financial leverage. Further, the results from econometrical analysis reveal that determinants are industry specific, which implies that the weight of the explanatory variables varies from sector to sector The paper finally highlights creditor rights, maintenance of legal reserves and law enforcement, directors rights on borrowing, risk assessment are essential determinants of capital structure decision of a firm.