Determinants of Corporate Capital Structure among Selected Manufacturing Industries in India

Abstract

The financial success of a firm depends mainly on its capital structure Firms with unplanned Capital Structure can prosper in short run but face difficulties in mobilizing additional funds and in increasing the value of the business in the long run The choice of debt and equity in the capital structure of corporate firms is an important financial decision because it influences both the return and the risk of shareholders The excessive use of debt may endanger the survival of the corporate firm, at the same time nonuse of debt prevents the firm from an opportunity to enhance the rate of return to its equity holders Capital Structure refers to the proportionate relationship between newlinedifferent components of financing mix or long term sources of funds such as debentures newlinelong term debt preference capital and equity share capital including reserves and surplus Brealy and Myers Capital structure is dependent on the financing decision of a firm A firm may decide to finance its investment requirement either only through equity or only through debt or a mixture of both Normally firms follow the third option Bhattacharyya and Banerjee It is generally understood that the optimal capital structure of a firm is the composition of debt and equity which results in the minimum cost of capital and thus determination of an optimal capital structure is not an exact science The firms have to analyze a number of factors such as the firms business risk its financial flexibility shareholders wealth maximization survival against competitors assurance of a steady newlinesource of funds acquisition and maintenance of a good rating in the market profitability newlineand growth rate before deciding upon an appropriate capital structure All these factors are a pointer to one important fact that companies will have to search for the right newlinecapital structure which enhances its value while minimizing costs A corporate capital newlinestructure depends on the companies financial solutions which may either be a random newlineone or reflects the results of rational selection