An Empirical Study on Capital Structure in Indian Manufacturing Sector

Abstract

The study has been divided into two parts. The first part of the article analyzes the trends of capital structure of selected sample companies. The second part analyzes empirically the impact of leverage on firm’s value of selected sample companies. A sample size of 422 listed Indian manufacturing companies on Bombay Stock Exchange (BSE) has been taken to analyze the trends and leverage effect. A period of 10 years from 2003–2004 to 2012–2013 and annual financial standalone data have been considered to analyze the trends and leverage effect. Ratio analysis and panel data approach have been applied to perform the empirical study. It has been found empirically that there is a substantial debt level in the capital structure of the companies and there is no significant relationship between firm’s value and leverage using panel data fixed effect regression approach applied on four different models. In other words, leverage has no impact on the firm’s value in Indian manufacturing industry. However, variables such as size, age, profitability and growth of the firm are positively and significantly correlated with the firm value in Indian manufacturing industry. In addition, there is a significant relationship between firm value and industry practice of the firm. Business risk has no significant relationship with firm value. Thus, the findings of the study would enhance the literature on capital structure and is relevant for the Indian manufacturing industry in taking its capital structure decisions, as it is based on the most recent data and covers the period of both pre- and post-recession of 2008–2009.

Keywords

Capital structure financial leverage capital gearing manufacturing firm value capital trends panel data enterprise value

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