Capital structure dynamics of Indian corporates

Abstract

Purpose The purpose of this paper is to examine the capital structure determinants and speed of adjustment (SOA) toward the target capital structure of firms. Design/methodology/approach The study has used the generalized method of moments (GMM) model and two-stage least squares (TSLS) to the panel data of 3,310 Indian firms, from January 2000 to March 2018, to determine the adjustment speed toward target capital structure. Further, the study employed a fully modified ordinary least square technique to shed light on the dynamic nature of the adjustment process. Findings The results of the GMM estimations indicate that Indian firms are adjusting their capital structure toward the target rate of 10.38 percent per year. Similarly, the findings of TSLS estimate specify a SOA of 15.49 percent per year. The low adjustment speed suggests the prevalence of higher adjustment costs of Indian firms. Research limitations/implications Future research can be undertaken by including certain macroeconomic factors such as GDP, inflation and the interest rate, which also affect the SOA since firms are pretentious by market conditions while designing capital structure for firms. Practical implications In the current financial and regulatory set-up when there are frequent perturbations in the capital market, the study will be valuable for regulators, firms and academicians. The work would enable the concerned stakeholders to manage their scare resources and capital effectively by a better way to make informed decisions. It will facilitate managers of young companies to identify and regulate the factors that are more pertinent for them to make flexible financial decisions concerning the capital structure. Originality/value The study amplifies on previous studies and provides new insights on the speed of the adjustment process of Indian firms, helping to modify and refine their capital structures toward the optimum capital structure. This will not only enhance the financial flexibility in the capital structure of Indian corporates but also be of great value to the policymakers and other stakeholders.

The Effect of Financial Performance and Innovation on Leverage: Evidence from Indonesian Food and Beverage Sector

“…Concerning the profitability variable, profitability has a negative influence on capital structure, which means that a company that has a high level of profitability will reduce capital dependence on outside parties. The higher level of profit allows the management to obtain most of its internal funding of retained earnings before the firm uses external funding sources such as debt (Prieto & Lee, 2019;Rani et al, 2019). This finding shows that higher profits of the company and more inner equity source will be obtained so that the portion of the debt will be smaller and affect debt policy.…”

“…Furthermore, some analyzed the dynamic capital structure by targeting leverage as well as the speed of adjustment (Li, Wu, Xu & Tang, 2017;Abdeljawad & Nor, 2017;Rani, Yadav & Tripathy, 2019). All the results present some novelty and the appropriate variables of leverage.…”

The Controlling of Ownership on the relationship between Financial Performance and Capital Structure in Indonesia

“…Tangible assets affect the sources of expenditure and describe some of the numbers of assets that can be used as collateral (Jermias & Yigit, 2019). The firms with a large portion of fixed assets will find it easier to make loans to external parties because they are considered to have better securable assets and guarantee repayment (Rani et al, 2019;Sanil et., 2018;Forte et al, 2013). H3: Tangible assets effect on capital structure positively (+).…”

“…Based on trade-off theory, big companies must loan more because businesses that are managed are more diverse with fewer possibilities for bankruptcy, while smaller companies must operate with low leverage because they are easier to deal with problems of financial difficulties and liquidation (Yang et al, 2015;Rani et al, 2019). Furthermore, innovation and competitive market changes are quickly adopted by large companies compared to new companies and small-medium sized businesses due to the high amount of resources for significant investments (Jermias & Yigit, 2019;Muzir, 2011;Lim, 2012;Lee et al, 2013).…”

Size, Growth, Profitability and Capital Structure

“…The right proportion between debt and equity will create an optimal capital structure for increasing firm value. In explaining the determinants of capital structure, the theoretical approaches used include trade-off theory and pecking order theory (Le & Phan (2017); Mishra & Dasgupta (2019); Orlova et al (2020); Rani et al (2019); Stamou et al (2020)). Trade-off theory assumes that an optimal capital structure can maximize shareholder wealth, minimize bankruptcy risk, and increase firm value (Neves et al, 2020).…”