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The capital structure of a company depicts different proportions of capital it has sourced for financing its operation. The capital structure is nothing but the composition of owned and the owed capital. There are several determinants including both micro and macro factors that affect the capital structure decisions. This research paper aims to investigate the effect of firm specific as well as macroeconomic variables on the capital structure of selected firms of the Indian automobile sector. The study is empirically based on analytical research design based on secondary data for the period 2004 to 2020. In order to identify the key determinants of capital structure two step system GMM model is used as this estimator helps to resolve the problem of autocorrelation as well as heteroskedasticity. The results indicate that changes in firm specific factors like firm size and assets tangibility has a significant positive impact on capital structure variables while risk of bankruptcy and short term solvency negatively determine the capital structure. The study revealed that the macroeconomic environment plays a vigorous role in determining the capital structure where the factors like currency strength has a negative and statistically significant impact on the capital structure while FDI inflows establish a positive association with leverage ratios of Indian automobile firms.
Keywords: Indian Automobile Sector, Capital Structure, Firm Specific Factors, Macroeconomic Variables,
JEL Classification: G30, L6
(ProQuest: ... denotes formulae omited.)
Section I
Introduction
In relation to a company, capital structure is defined as the long term financing depicted by debt, hybrid stock and shareholders' equity. The decision of capital structure is strategically important for firms in its thrust for an optimal capital structure. An optimal capital structure not only renders higher return to the shareholders but also meliorate the competency of a firm. The decision of capital structure comes under the domain of the financial policy of a firm and it plays a substantial role in accomplishing the wealth maximization objective of firms in the long run.
Empirical studies on factors impacting the capital structure have enriched the literature from time to time. However, the debate on the effect of firm specific variables and macroeconomic factors on 'value of firm' is still prevalent. The debate began with the revolutionary article by Modigliani and Miller...