Yohanes Kristiawan H 16668

This article presents empirical evidence on the determinants of the capital structure of non-financial firms in India based on firm specific data.

Modigliani-Miller (MM) Theory Static trade-off theory Pecking order theory The Tax Based Theory The Signaling Theory The Agency Theory

Tax effect and signaling effect play a role in financing decisions where as agency cost effect financing decision of big business houses and foreign firms The size of the firm and business risk became significant factors influencing the capital structure during post-liberalization period.

Measures of leverage (Dependent variable) Book leverage Market leverage Explanatory variables Non-debt tax shield (NDTS) Tangibility Profitability Business risk Growth opportunity Growth Size Agency variables big business group firms, foreign private firms, other firms

Regression model used to analyze the determinants of Indian firms’ capital structure.

Empirical Result The book value based leverage (LBV) has decrease during post liberalization period whereas, market value based leverage (LMV) shows increase during the same period. Non-dept tax shield (NDTS) has decreased during post liberalization period due to declined tax rates. Profitability has also decreased due to increased competition due to liberalization and general recession in some major sectors.

There has been significant decrease in mean debt- equity ratio across the groups and industries. Except growth rate and size all other explanatory variables have significant correlation with leverage during liberalization period

The interpretation of these result is presented below: Tax and signaling effects on financing decisions The overall results are consistent with the prediction of the tax based model and signaling model. The estimated coefficients of Non-debt tax shield, Cash operating profit, Market to book value ratio are consistently significant and have predicted signs across the equations. Agency effects on financing decisions Foreign investors are not adopting high leverage to discipline management. For big group firms these coefficients are negative and significant when leverage is measured in terms of market value. Industry classification have no impact on the determinants of debt-equity choices.

Traditional factors that are affecting financing decisions are profitability, tangibility, taxes, and growth are all significant. The size and risk measures are additional factors which influence capital structure decisions during post liberalization period. Ownership pattern is significant when leverage is measured in terms of market value. Leverage measured in terms of market value reveals better goodness of fit.