Determinants of capital structure; a sector-level analysis for Indian manufacturing firms

Abstract

Purpose

The purpose of this paper is to empirically analyze the determinants of capital structure and their long-run equilibrium relationships with firm-specific and macroeconomic indicators for Indian manufacturing firms.

Design/methodology/approach

The study is conducted using the panel semi-parametric and non-parametric regression models to identify the key determinants of capital structure. Panel cointegration models are also employed for analyzing the long-run equilibrium association of capital structure with its determinants.

Findings

The study finds that each manufacturing sector has unique determinants of capital structure. The debt level is significantly affected by asset tangibility, growth opportunity, effective tax rate, non-debt tax shield, cash flow, profitability, firm size, foreign investment, government borrowing, economic growth, and interest rate. All these firm-specific and macroeconomic variables have strong long-run equilibrium relationship with capital structure as a whole.

Practical Implication of the Study

The study analyzes the determinants of capital structure for eight manufacturing sectors of India, which helps firm managers and policy-makers to identify appropriate factors that maximize firm value. The sector-specific features of firms may lead to a new path with regard to corporate governance and ownership structure to enhance stakeholder's satisfaction.

Originality/value

The use of semi-parametric and non-parametric panel regression models to analyze the determinants of capital structure, and the use of panel cointegration approach to explore the long-run equilibrium relationship between the determinants and its factors are the unique contributions of the present research.

Citation

Panda, A.K. and Nanda, S. (2020), "Determinants of capital structure; a sector-level analysis for Indian manufacturing firms", International Journal of Productivity and Performance Management, Vol. 69 No. 5, pp. 1033-1060. https://doi.org/10.1108/IJPPM-12-2018-0451