Impact of Diversification Strategy on Capital Structure Systematic Risk and Corporate Performance in Indian Context

Abstract

This study investigates the impact of diversification strategy on capital structure and corporate performance of corporate sector in India. It also computes the relationship between corporate capital structure and corporate performance with systematic risk. The researcher explores important and statistically significant effects through the study such as effect of diversification strategy on corporate performance and corporate value creation using cross sectional data. The data for the present study is taken from well known academic data house known as Prowess of CMIE (Centre for Monitoring Indian Economy). The sample for study is a set of all the companies which diversified during the year 2006-2011 and are listed at BSE (Bombay Stock Exchange) as well as NSE (National stock exchange) of India. In line of identification of the study variables, the dependent variables of the study are capital structure (Leverage), systematic risk and corporate performance through structured models know as the Leverage (LEV) Model, Market Risk (and#946;) Model and Corporate Performance Model. The dependent variables of the study such as corporate capital structure is measured by popular corporate leverage ratio like, debt equity ratio or total debt to total assets (TDTA) some of the other ratios are total debt to total assets (TDTA), long-term debt to total assets (LTDTA) and short-term debt to total assets (STDTA) are used as proxies for capital structure. Further the systematic risk of the companies is measured by calculating the covariance of market movement with respect to that of the stock movement [Cov (Ri,Rm)/Var (Rm)]. The corporate financial performance is price earnings (PE) Ratio measured profit after tax / total assets, and return on equity and (ROE) measured by profit after tax / no. of shares outstanding. However, the independent variables are classified as Diversification Index (DI), Corporate Size (SIZ), Profitability (PROF) and Asset Tangibility (AT).