The capital structure puzzle – evidence from Indian energy sector

2019 ◽  
Vol 13 (1) ◽  
pp. 2-23 ◽  
Author(s):  
Anindita Chakrabarti ◽  
Ahindra Chakrabarti
Keyword(s):  
Capital Structure ◽  
Negative Relationship ◽  
Energy Sector ◽  
Empirical Literature ◽  
Content Type ◽  
Factors Affecting ◽  
Tax Shield ◽  
Asset Turnover ◽  
Energy Companies ◽  
The Capital Structure

Purpose The purpose of this paper is to determine the factors affecting the capital structure of companies engaged in the Indian energy sector. Design/methodology/approach Capital structure theories and empirical literature have been reviewed to formulate propositions concerning the factors/variables determining the capital structure of Indian energy companies. The examination is done using panel data techniques for the sample 141 companies operating in the Indian energy sector. Findings The results show firms’ age, asset turnover ratio, liquidity and firms’ size to be significant determinants of capital structure for the Indian energy companies, while profitability, debt service capacity, sales growth, non-debt tax shield and tangibility ratio to be insignificant determinants. Historically, profitability has shared a significantly negative relationship with debt ratio; however, the relation here is not significant. Research limitations/implications The focus of the current study is on Indian energy sector, the results obtained will not be applicable for other sectors. Originality/value The current research gives an insight into the determinants of capital structure of the companies engaged in the Indian energy sector, which are mostly overlooked due to the laws, policies and regulations governing the sector as a whole.

scholarly journals Determining the Factors Affecting Capital Structure Decisions of Real Sector Companies Operating in ISE

2017 ◽  
Vol 9 (8) ◽  
pp. 25 ◽  
Author(s):  
Bengü Vuran ◽  
Nihat Tas ◽  
Burcu Adiloglu
Keyword(s):  
Capital Structure ◽  
Firm Growth ◽  
Positive Impact ◽  
Stock Exchange ◽  
Negative Relationship ◽  
Order Theory ◽  
Service Firms ◽  
Factors Affecting ◽  
Tax Shield ◽  
The Capital Structure

Corporate capital structure remains a controversial issue in modern corporate finance. Since the seminal work by Modigliani and Miller (1958), a plethora of research has been undertaken in attempting to identify the determinants of capital structure. This paper analyzes the capital structure determinants of manufacturing, merchandising and service firms operating in Istanbul Stock Exchange (ISE) during the period from 2010 to 2013 comprising of 218 companies. This study addresses the following questions: Are the capital structure determinants of three types of firms in ISE driven by different factors? To answer this question, panel data methodology is applied to the sample of firms for the period from 2010 to 2013. The results show that the manufacturing and merchandising firms exhibit similarities in their capital structure choices. For those firms, size and firm growth are positively related to leverage, whereas profitability have a negative relationship with their debt to assets ratio. For service firms, size and non-debt tax shield have significant positive impact on leverage but profitability negatively related to leverage. These findings provide evidence in favour of trade off theory and pecking order theory.

The effect of the number of bank relationships on firm leverage: high-risk shift and the curse of mainstream banks

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Yusuf Dinc ◽  
Rumeysa Bilgin
Keyword(s):  
High Risk ◽  
Capital Structure ◽  
Banking Sector ◽  
Negative Relationship ◽  
Estimation Method ◽  
Shareholder Wealth ◽  
Cost Of Debt ◽  
Content Type ◽  
Firm Leverage ◽  
The Capital Structure

Purpose Firms prefer to have more than one bank relationship to secure the flow of funds for their operations, particularly in bank-based economies. On the other hand, banks lean toward expanding their customer base with firms already in the credit market. The purpose of this study is to investigate the effect of the number of bank relationships as a firm-specific determinant of capital structure and to discuss its impact on the banking sector. Design/methodology/approach A two-step system generalized method of the moments estimation method is used in this study. The sample comprises 213 Turkish non-financial, publicly listed firms with a positive shareholder’s value for the 2012–2017 period. Findings The findings show that the number of bank relationships increases the leverage of sample firms while the concentration in the banking sector decreases it. These rather intriguing findings are attributed to an under-the-counter credit policy that causes a high-risk shift and a curse of mainstream banks. Once the mainstream banks allocated credit to the firm, its credibility is consumed by the following banks, which is implied by the significantly negative relationship between bank concentration and firm leverage. This problem is defined as the mainstream bank curse in the study. Originality/value The previous literature focuses on the effects of the number of bank relationships on firm profitability, cost of debt and shareholder wealth. However, its impact on the capital structure has not yet been systematically investigated. To the authors’ knowledge, this is the first study to critically analyze the effect of the number of bank relationships on the capital structure. The findings will be of immense benefit to the banking sector and the regulatory bodies.

Determinants of capital structure of banks: evidence from the Kingdom of Saudi Arabia

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Shoaib Khan ◽  
Usman Bashir ◽  
Md. Saiful Islam
Keyword(s):  
Saudi Arabia ◽  
Capital Structure ◽  
Commercial Banks ◽  
Kingdom Of Saudi Arabia ◽  
Content Type ◽  
Factors Affecting ◽  
Earnings Volatility ◽  
Explanatory Variables ◽  
Practical Implications ◽  
The Capital Structure

Purpose The purpose of this study is to investigate the most important factors that affect the capital structure of commercial banks in the Kingdom of Saudi Arabia. Design/methodology/approach This study uses annual data of 11 Saudi commercial, national banks listed on the tadawul Saudi stock exchange for the period 2010–2017. Data was collected from the banks financial statements, tadawul annual publications and Saudi Arabian Monetary Authority. By constructing a balanced panel, this study uses pooled ordinary least squares regression along with fixed effects and random effects to examine the relationship between the bank’s book leverage as the dependent variable and bank-specific explanatory variables that include profitability, tangibility, earnings volatility, growth opportunities and bank size, while controlling for macroeconomic conditions. Findings The findings of this study suggest that banks in Saudi Arabia are highly leveraged, endorsing the fact that the nature of banks’ business is different from non-banking firms. Earnings volatility, growth and bank size show positive and significant relations with book leverage. Profitability and tangibility are negatively related to the book leverage. Empirically, the explanatory variables profitability, earnings volatility, tangibility, growth and bank size have material effects on the capital structure decisions of Saudi commercial banks. In summary, the determinants of capital structure for Saudi banks are the same as those of non-financial firms but are distinctive in nature. Research limitations/implications An extensive study on all the banks operating in Gulf Cooperation Council (GCC) countries is suggested. Practical implications The findings have practical implications for bank managers, which will help them to identify the bank-specific factors affecting the capital structure and choose the values enhancing optimal capital structure. The results of this study can assist regulatory agencies to formulate an effective regulatory framework. Moreover, the findings lay a foundation for the development of financial sector under the umbrella of the Vision 2030 program in the Kingdom. Originality/value To the best of the authors’ knowledge, this is the first study to explore the factors affecting the capital structure choices of commercial banks operating in the Kingdom of Saudi Arabia. Moreover, the findings of the study would prove useful in detailed studies of capital structure in the GCC countries as well.

US REITs capital structure determinants and financial economic crisis effects

2017 ◽  
Vol 35 (6) ◽  
pp. 556-574 ◽  
Author(s):  
Giacomo Morri ◽  
Edoardo Parri
Keyword(s):  
Capital Structure ◽  
Economic Crisis ◽  
Negative Relationship ◽  
Financial Economic ◽  
Financial Leverage ◽  
Growth Opportunities ◽  
Content Type ◽  
The Us ◽  
Operating Risk ◽  
The Capital Structure

Purpose The purpose of this paper is to identify the capital structure determinants through an analysis of 74 All-Equity REITs listed in the US market from 2005 to 2014. Furthermore, the paper aims at understanding the impact of the financial economic crisis (FEC) among the identified explanatory variables. Design/methodology/approach A fixed effect panel regression model is performed based on Trade-off Theory (TOT) and Pecking Order Theory as a starting point to provide expectations on the relationships incurring among the identified variables. Findings First, while tangibility of assets and crisis evidenced a positive relationship with REITs’ financial leverage, operating risk and growth opportunities variables displayed a negative relationship. Meanwhile, size and profitability did not appear to influence the capital structure. Second, it appears that the positive effects of tangibility of assets and profitability variables on US REITs’ capital structure increased as a consequence of the FEC. Operating risk and growth opportunities variables slightly increased their negative relationship with US REITs’ capital structure after the FEC. The TOT prevails when explaining the economic reality underlying US REITs. Practical implications The paper contributes to the understanding of US REITs’ financing decisions within the US market. The FEC also had a substantial indirect impact on the financial leverage determinants of US REITs, the latter being nowadays more oriented to maintaining a flexible capital structure. Originality/value The paper provides a comprehensive view of the medium-term effect of the FEC on US REITs’ capital structure.

Factors affecting financial leveraging for BSE listed real estate development companies in India

2018 ◽  
Vol 23 (3) ◽  
pp. 274-294
Author(s):  
Rakesh Kumar Sharma
Keyword(s):  
Real Estate ◽  
Capital Structure ◽  
Short Term ◽  
Firm Level ◽  
Content Type ◽  
Factors Affecting ◽  
Tax Shield ◽  
Total Debt ◽  
Real Estate Sector

PurposeThe real estate sector in India has assumed growing importance with the liberalisation of the economy. Developments in the real estate sector are being influenced by the developments in the retail, hospitality and entertainment (e.g. hotels, resorts and cinema theatres) segment, economic services (e.g. hospitals, schools) and information technology-enabled services (such as call centres), and vice versa. This paper aims to study the determinants of capital structure by taking into account 125 major Bombay Stock Exchange (BSE) listed real estate companies selected on the basis of their market capitalisation.Design/methodology/approachTo discover what determines capital structure, nine firm level explanatory variables (profitability-EBIT margin, return on assets, earnings volatility, non-debt tax shield, tangibility, size, growth, age debt service ratio and tax shield) were selected and regressed against the appropriate capital structure measures, namely, total debt to total assets, long-term debts to total assets, short-term debts to total assets, total liabilities to total liabilities plus equity, total debt to capital used and total debt to total liabilities plus equity. A sample of 125 real estate companies was taken and secondary data were collected. Consequently, multivariate regression analysis was made based on financial statement data of the selected companies over the study period of 2009-2015.FindingsThe major findings of the study indicated that profitability, size, age, debt service capacity growth and tax shield variables are the significant firm-level determinants.Research limitations/implicationsThe present study is carried out by taking data of only 25 companies listed on the BSE and time period covered from 2009 from 2015. Time period and sample size may be limitations of the current study.Practical implicationsThe present study is an empirical analysis of the determinants of leverage of real estate sector in India with most recent available data. Different regression equations have been formed to develop the models using firm-specific determinants and different measures of leverage or capital structure. Data were regressed using SPSS application software, and the resulting (or obtained) regression outputs are analysed. This study will help the Indian real estate companies to the know the impact of different variables while raising short-term and long-term loans.Social implicationsThe current study will benefit all stakeholders of society who are fascinated to be acquainted with the financing of real estate companies and the factors affecting long-term and short-term financing of this sector. Specifically, public engrossed in different modes of investment and financial institution will be the prime gainers.Originality/valueThe present study has been completed using authentic data from the annual reports and database. This study uses explanatory variables and different measures of leverage which were limited in use in previous studies. Moreover, this research is a comprehensive study that deals with developing different regression models by using diverse measures of leverage.

A study on the capital structure determinants of FMCG companies in India

2021 ◽  
pp. 2150008
Author(s):  
Poornima BG ◽  
Pushpender Kumar
Keyword(s):  
Capital Structure ◽  
Order Theory ◽  
Short Term ◽  
Pecking Order Theory ◽  
Factors Affecting ◽  
Tax Shield ◽  
Total Debt ◽  
Debt Tax Shield ◽  
The Capital Structure

Fast Moving Consumers Goods (FMCG) sector is the fastest and the fourth largest sector of the Indian economy. This study attempts to identify the critical factors affecting the financing decisions of 15 FMCG companies using panel framework and tries to investigate whether the factors considered provide convincing explanation as per the capital structure models like peking order theory, trade-off theory and Agency theory developed over a period of time. The data are collected from CMIE Prowess database for the period 2008 to 2019. The variables considered are profitability, size, non-debt tax shield, tangibility, uniqueness, liquidity and origin. It is found that Pooled OLS is the appropriate model for explaining the factors influencing the short-term debt, long-term debt and total debt as the dependent variables. It is evident that the short-term debt of the company is influenced by profitability, non-debt tax shield and liquidity of the company; the long-term debt is influenced by profitability, tangibility and origin of the company; and the total debt is affected by profitability, size and liquidity of the company. The factors which are significant confirm to the expected behavior with respect to pecking order theory of capital structure.

scholarly journals Factors affecting Financing Decision of Indian Power & Energy Sector and Testing of Capital Structure Theories: Panel Data Analysis

2020 ◽  
Vol 19 (1) ◽  
pp. 71
Author(s):  
Rajesh Desai
Keyword(s):  
Panel Data ◽  
Capital Structure ◽  
Panel Data Analysis ◽  
Energy Sector ◽  
Factors Affecting ◽  
Financing Decision ◽  
Coverage Ratio ◽  
Tax Shield ◽  
Set Up ◽  
Power And Energy

Capital structure (CS) is defined as combination of various sources of funds employed in business. Appropriate source of financing is inevitable for any company to exist. Present paper analyses the determinants affecting the choice of debt or equity of selected power and energy sector companies of India. For the purpose of empirical testing, panel data of 25 listed companies has been collected for 10 years (2010-2019). Based on panel regression model, the study concludes that profitability, tangibility, liquidity, non-debt tax shield, and interest coverage ratio are major determinants of CS choice of selected companies. In addition to this, study also validate the applicability of CS theories in Indian set up and concludes that power & energy companies follow the propositions of pecking order and trade-off theory. The findings of the paper will be useful to managers as it portrays critical factors affecting the CS and analysing their impact on financing decision. It will also enrich the existing pool of research in the area of capital structure and bridge the gap in existing research.

Impact of macroeconomic variables on corporate capital structure: a case of India

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Bhavna Ranjan Ahuja ◽  
Rosy Kalra
Keyword(s):  
Capital Structure ◽  
Negative Relationship ◽  
Manufacturing Companies ◽  
Content Type ◽  
Macroeconomic Variables ◽  
Large Size ◽  
Indian Context ◽  
The Impact ◽  
The Capital Structure

PurposeThe purpose of the paper is to examine the impact of macroeconomic variables on the capital structure of manufacturing companies in the Indian context.Design/methodology/approachThe paper employs panel regression technique (random effects model) on a sample of 1,029 listed Indian manufacturing companies divided into two categories – large-size companies and mid-size companies for the last ten years from FY 2008–09 to FY 2017–18. Two separate models pertaining to long-term leverage (TTL_TNW ratio) and total leverage (TOL_TNW) have been examined.FindingsMajor findings show that macroeconomic variables play a relatively more important role in deciding the long-term debt component in the capital structure of the firms as compared to short-term loans. Similarly macroeconomic variables are found to be more significant in case of large-size companies as compared to mid-size companies. Also, there is a negative relationship between market capitalisation and leverage and bank credit and leverage, whereas money supply has a positive relationship with leverage.Research limitations/implicationsThe study makes an important contribution to the existing literature in understanding better how macroeconomic variables play an important role in determining the capital structure of firms. In the present dynamic economic environment, such a study lays down the macro areas on which the academicians, policymakers and financial managers can focus with respect to corporate financing decisions. The firm-specific factors have not been taken into account. Inclusion of these factors will make the results more robust.Originality/valueThe study focusses on the impact of macroeconomic variables on the capital structure decision of the Indian firms. Several studies in this area have been done in the context of the developed countries. However, there are not many studies in the Indian context that examine the relationship between financing decision and macroeconomic variables. The results that have been derived in case of developed economies may not be extended in the Indian context as there are considerable differences across countries related to corporate and legal environment, taxation system, corporate governance laws, interest rate environments, banking system, sources of funds and so on. Therefore, it becomes important to focus on countries individually.

Factors affecting the capital structure in energy sector of Pakistan

2013 ◽  
Vol 5 (3) ◽  
pp. 503-510 ◽  
Author(s):  
Zartashia Aamir ◽  
Saqib Gulzar ◽  
Fatima Uzma ◽  
Saqlain Aslam Khan
Keyword(s):  
Capital Structure ◽  
Energy Sector ◽  
Factors Affecting ◽  
The Capital Structure

Do corporate diversification and earnings management practices affect capital structure?

2015 ◽  
Vol 7 (4) ◽  
pp. 360-378 ◽  
Author(s):  
Ranjitha Ajay ◽  
R Madhumathi
Keyword(s):  
Capital Structure ◽  
Earnings Management ◽  
Management Practices ◽  
Negative Relationship ◽  
Corporate Diversification ◽  
Content Type ◽  
Diversification Strategies ◽  
Market Product ◽  
Diversified Firms ◽  
The Impact

Purpose – The purpose of this paper is to empirically examine the impact of earnings management on capital structure across firm diversification strategies. Design/methodology/approach – The study focuses on firms operating in the manufacturing sector (diversified and focused). Panel data methodology compares diversification strategies and identifies the impact of diversification strategy with earnings management practices on capital structure decision. Findings – International and product diversified firms have lower levels of leverage than focused firms in their capital structure. Asset-based earnings management is positive for diversified (market/product) firms. Earnings management using discretionary expenditure (project based) is found to be higher for market diversified but product-focused firms. Earning smoothing method is found to be significant for focused firms and shows a negative relationship with capital structure. Originality/value – This study offers an insight into the relationship between corporate diversification, earnings management and capital structure decisions of manufacturing firms. The results provide an important contribution to accounting and strategy literature. A distinction is made between market- and product-diversified firms and influence of earnings management practices (asset-based, project-based and earnings smoothing (ESM)) on capital structure decisions. Diversified firms (market/product) tend to have lower levels of leverage than focused firms and earnings management practices within firm groups significantly influence the capital structure decisions.

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