Impact of Capital Structure on Shareholder Value in Indian Pharmaceutical Industry: An Empirical Approach Through Created Shareholder Value

Abstract

Enhancing shareholder value is one of the primary goals along with the profitability in the competitive world. Top-level management is striving for creating the higher shareholder value by making efficient decisions. Shareholder value as the key objective of the firm and measures such as economic value added, market value added, shareholder value added and created shareholder value (CSV) have gained popularity in measuring the shareholder wealth creation. Among various financing decisions, capital structure decision plays a vital role, that is, mix of debt and equity. Considering the optimal capital structure with the right balance between equity and debt is always a challenge for the financial managers, and also to run the business successfully by gaining higher profits and enhancing shareholder value. An attempt has been made to analyse the capital structure impact on shareholder value by considering CSV as a shareholder value measure in 77 Indian pharmaceutical firms listed in BSE over a period of 9 years from 2007 to 2015. Using the balanced panel data and regression models, we found that determinants such as debt–equity ratio, long-term debt ratio and short-term debt ratios have positive correlation with CSV and negatively related to total debt ratio in the absence of tax.