Determinants of Capital Structure: An Empirical Analysis of Indian Private Corporate Sector

The objective of this paper is to examine the capital structure of the Indian firms. The investigation has been performed using panel data procedure for a sample of 504 Indian companies listed on any Stock Exchange of India during 1994–95 2003–04. The hypothesis that is tested in this paper is that the debt ratio at time t depends upon the asset structure at time t, the size at time t, the return on assets at time t, and the debt ratio at time t-1. I have used multivariate regression analysis to find out the significant factors for determinant of capital structure. The empirical results justify our hypothesis that the debt ratio of the Indian companies is positively related to its asset structure and its growth rate, and negatively related to its profitability, business risk and non-debt tax shield. Thus, I conclude that firms that maintain a large proportion of fixed assets tend to maintain a higher debt ratio than smaller firms. Furthermore, larger firms employ more debt capital in comparison with smaller firms and firms with high profitability ratios tend to use less debt than firms that do not generate high profits. My findings also suggest that firms do follow a target capital structure during the examined period. These results are consistent with the theoretical background presented in the second section of the paper.