SUITABILITY OF CAPITAL STRUCTURE THEORIES – EVIDENCE FROM CORPORATE INDIA
Abstract
Capital structure decisions are the most crucial decisions in Financial Management of Corporates. This study examines the suitability of capital structure theories in select industries of Corporate India. Applicability of capital structure theories viz., Trade off, Agency cost, Pecking order and Signaling theories on select Five large industries in India were done. From those industries a sample of ten companies were selected on the basis of stratified random sampling techniques. The data collected from ACE Equity database for a period of sixteen years from 2006-2007 to 2021-2022. The tools applied for analysis is Ordinary Least Square regression method. The study concluded that the Indian Automobile Industry follows pecking order theory for their capital structure decisions whereas little evidence is there for trade- off theory, agency theory and signaling theory. There is little evidence to support all the four theories viz., trade-off theory, agency theory, signaling theory and pecking order theory in the Engineering - construction Industry. There is little evidence for trade-off theory, agency theory, signaling theory and pecking order theory in Cement industry. The Indian Pharmaceutical Industry’s decisions pertaining to capital structure are in tune with pecking order theory. At the same time there exists little evidence for trade-off theory, agency theory and signaling theory. Further in case of Computers – Software Industry, the results support pecking order theory, trade-off theory and agency theory. Whereas only little support is given to signaling theory in deciding the capital structure.
Keyword : Capital structure, Trade off theory, Agency cost theory, Pecking order theory, Signaling theory
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