Impact of macroeconomic variables on corporate capital structure: a case of India

Abstract

PurposeThe purpose of the paper is to examine the impact of macroeconomic variables on the capital structure of manufacturing companies in the Indian context.Design/methodology/approachThe paper employs panel regression technique (random effects model) on a sample of 1,029 listed Indian manufacturing companies divided into two categories – large-size companies and mid-size companies for the last ten years from FY 2008–09 to FY 2017–18. Two separate models pertaining to long-term leverage (TTL_TNW ratio) and total leverage (TOL_TNW) have been examined.FindingsMajor findings show that macroeconomic variables play a relatively more important role in deciding the long-term debt component in the capital structure of the firms as compared to short-term loans. Similarly macroeconomic variables are found to be more significant in case of large-size companies as compared to mid-size companies. Also, there is a negative relationship between market capitalisation and leverage and bank credit and leverage, whereas money supply has a positive relationship with leverage.Research limitations/implicationsThe study makes an important contribution to the existing literature in understanding better how macroeconomic variables play an important role in determining the capital structure of firms. In the present dynamic economic environment, such a study lays down the macro areas on which the academicians, policymakers and financial managers can focus with respect to corporate financing decisions. The firm-specific factors have not been taken into account. Inclusion of these factors will make the results more robust.Originality/valueThe study focusses on the impact of macroeconomic variables on the capital structure decision of the Indian firms. Several studies in this area have been done in the context of the developed countries. However, there are not many studies in the Indian context that examine the relationship between financing decision and macroeconomic variables. The results that have been derived in case of developed economies may not be extended in the Indian context as there are considerable differences across countries related to corporate and legal environment, taxation system, corporate governance laws, interest rate environments, banking system, sources of funds and so on. Therefore, it becomes important to focus on countries individually.

Capital Structure and Macroeconomic Determinants in Emerging Country: A Panel Quantile Regression Approach

“…The macroeconomic determinants that influence corporate capital structure decisions are closely tied to both monetary and fiscal policy dynamics (Titman & Wessels, 1988, Ahuja & Kalra, 2020. In this research, we include the Gross Domestic Product growth rate (GR) and unemployment rate (UR) to measure the level stability and economic development (Mokhova & Zinecker, 2014).…”

“…Therefore, analyzing the determinants of capital structure in these countries can provide important insights into the behavior of firms and their interaction with the broader economy. The inclusion of macroeconomic factors in this analysis can also provide a more comprehensive understanding of the relationship between capital structure and economic conditions (Ahuja & Kalra, 2020). Macroeconomic variables such as inflation, interest rates, and GDP growth can affect the cost of financing and the availability of credit, which may impact the debt-equity mix that firms adopt.…”

“…Secondly, companies that have more debt being riskier valued less than companies with less debt. For this reason, the capital structure is very important decision as it could lead to an optimal financing mix that can maximize the firm market price (Ahuja & Kalra 2020). There are numerous capital structure theories that aim to explain the company's behavior allowing to a finance choice of a company.…”