Determinants of Capital Structure : An Exclusive Study of Passenger Car Companies in India

S. Santhosh Kumar; C. Bindu

doi:10.17010/ijf/2018/v12i5/123695

Determinants of Capital Structure : An Exclusive Study of Passenger Car Companies in India

Authors

S. Santhosh Kumar Professor, School of Management Studies, Cochin University of Science and Technology, Kochi, Kerala
C. Bindu Assistant Professor, Department of Commerce, Sree Narayana College, Cherthala, Kerala

DOI:

https://doi.org/10.17010/ijf/2018/v12i5/123695

Keywords:

Capital Structure

, Leverage, Determinants of Capital Structure, Debt-Equity Ratio

, G30, G32

Paper Submission Date

, February 9, 2018, Paper sent back for Revision, April 21, Paper Acceptance Date, April 26, 2018.

Abstract

Capital structure decision is one of the core financial decisions in a firm. Theoretically, composition of capital structure has a significant stake in determining the earnings available to equity holders and thereby, the market value of a firm. If it is so, a better understanding about the determinants of capital structure is inevitable to manage the decisions of a firm. This study attempted to identify the determinants of capital structure of passenger cars companies listed on the Bombay Stock Exchange (BSE) of India. The long-term debt to total capital ratio was considered as the dependent variable representing the capital structure. The determinants of capital structure which were considered as the independent variables are : (a) size of the firm, (b) profitability, (c) tangibility, (d) growth in assets, (e) non-debt tax shield, (f) debt service capacity, and (g) dividend payout ratio. A panel regression was run to identify the determinants by following a logical procedure for establishing the relationship. Though the independent variables were sensibly and carefully chosen from the existing literature, none of these determinants were found to have a statistically significant relationship with capital structure in the case of passenger car companies in India. However, the overall F - statistics confirmed that the specified model with the above explanatory variables had more predictability power and could explain more than what the intercept only model could explain.

Downloads

Download data is not yet available.

Downloads

Published

2018-05-01

How to Cite

Santhosh Kumar, S., & Bindu, C. (2018). Determinants of Capital Structure : An Exclusive Study of Passenger Car Companies in India. Indian Journal of Finance, 12(5), 43–53. https://doi.org/10.17010/ijf/2018/v12i5/123695

Download Citation

Issue

Volume 12, Issue 5, May 2018

Section

Articles

References

Ai-Ajmi, J., Hussain, H. A., & Al-Saheh, N. (2009). Decisions on capital structure in a Zakat environment with prohibition of Riba: The case of Saudi Arabia. The Journal of Risk Finance , 10 (5), 460 - 476.

Akhtar, T., Zahir, A., Tareq, M. A., & Rabbi, F. (2016). Capital structure and firm efficiency: A case of Pakistan. Indian Journal of Finance , 10 (2), 50 - 66. doi:10.17010/ijf/2016/v10i2/87243

Amsaveni, R., & Gomathi, S. (2012). Determinants of capital structure: A study of the pharmaceutical industry in India. Indian Journal of Finance , 6 (3), 4 - 14.

Bevan, A. A., & Danbolt, J. (2002). Capital structure and its determinants in the UK : A decompositional analysis. Applied Financial Economics, 12 (3), 159-170.

Bhaduri, S. N. (2002). Determinants of corporate borrowing : Some evidence from the Indian corporate structure. Journal of Economics and Finance, 26 (2), 200-215.

Brealey, R. A., Myers, S. C., & Marcus, A. J. (2012). Fundamentals of corporate finance. New York : Mc Graw Hill Education.

Buferna, F., Bangassa, K., & Hodkinson, L. (2005). Determinants of capital structure: Evidence from Libya (No. 2005/08). Retrieved from https://pdfs.semanticscholar.org/3342/a0afd100c75428a98aac4dc1c57dbaa6f492.pdf

Chaplinsky, S., & Niehaus, G. (1993). Do inside ownership and leverage share common determinants ? Quarterly Journal of Business and Economics , 32 (4), 51- 65.

Cheng, H. (2014). Determinants of capital structure in Asian firms: New evidence on the role of firm level factors, industry characteristics and institutions (Thesis). University of Leicester, England.

DeAngelo, H., & Masulis, R. W. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics , 8 (1), 3 - 29.

Demirguc-Kunt, A., & Maksimovic, V. (1999). Institutions, financial markets, and firm debt maturity. Journal of Financial Economics , 54 (3), 295 - 336.

Drobetz, W., & Fix, R. (2005). What are the determinants of capital structure ? Evidence from Switzerland. Swiss Journal of Economics and Statistics , 141 (1), 71-113.

Fama, E. F., & French, K. R. (2002). Testing trade-off and pecking order predictions about dividends and debt. The Review of Financial Studies , 15 (1), 1-33.

Fumani, M. A., & Moghadam, A. (2015). The effect of capital structure on firm value, the rate of return on equity and earnings per share of listed companies in Tehran Stock Exchange. Research Journal of Finance and Accounting , 6(15), 50 - 57.

Hackbarth, D., Hennessy, C. A., & Leland, H. E. (2007). Can the trade-off theory explain debt structure ? The Review of Financial Studies, 20 (5), 1389 - 1428.

Huang, G., & Song, F. M. (2006). The determinants of capital structure: Evidence from China. China Economic Review , 17 (1), 14 - 36.

Hiran, S. A., & Sojatia, M. (2015). An empirical analysis of capital structure and long term solvency position of Hindalco Industries Limited. Indian Journal of Finance, 9(2), 48 - 55. doi:10.17010/ijf/2015/v9i2/71528

Jagannathan, U. K., & Suresh, N. (2017). The nature and determinants of capital structure in Indian service firms. Indian Journal of Finance, 11 (11), 30 - 43. doi:10.17010/ijf/2017/v11i11/119340

Jalilvand, A., & Harris, R. S. (1984). Corporate behaviour in adjusting to capital structure and dividend targets: An econometric study. The Journal of Finance , 39 (1), 127-145.

Khanna, S., Srivastava, A., & Medury, Y. (2015). Is equity market timing the sole criteria for capital structure decisions? An insight from Indian firms. Indian Journal of Finance, 9 (10), 48 - 64. doi:10.17010/ijf/2015/v9i10/79558

Lawal, A. I. (2014). Capital structure and the value of the firm: Evidence from the Nigeria banking industry. Journal of Accounting and Management, 4 (1), 31- 41.

Mohanraj, D. V. (2011). Determinants of capital structure decision in Indian manufacturing industries - An empirical analysis. International Journal of Research in Computer Application and Management, 1 (8), 139 -142.

Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5 (2), 147-175.

Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance , 39 (3), 574 - 592.

Myers, S. C. (2001). Capital structure. The Journal of Economic Perspectives , 15 (2), 81-102.

Myers, S. C., & Majluf, N. M. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics , 13 (2), 187 - 221.

Pandey, I. M. (2002). Capital structure and market power interaction: Evidence from Malaysia. DOI : https://dx.doi.org/10.2139/ssrn.322700

Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance , 43 (1), 1-19.

Wald, J. K. (1999). How firm characteristics affect capital structure: An international comparison. The Journal of Financial Research , 22 (2), 161-187.