1

IMPACT OF CAPITAL STRUCTURE ON

FIRM VALUE: EVIDENCE FROM NIFTY
Mrs. Rajshree Sharma, Research Scholar, SOS in Management, Jiwaji University, Gwalior
Email id: [email protected]

Dr. Navita Nathani, Associate Professor, Prestige Institute of Management, Gwalior, Gwalior
Email id: [email protected]
Abstract. This study examines the effect of capital structure on value of firm of automobile companies during 2009 to 2018.
Variables including size. Profitability, Tangibility. Growth and age taken for examining value of firm .the study found that the
relation indicates leverage, profit, size, tangibility, and liquidity age are significantly effect on value of firm. Moreover,
fertilizer sector found insignificant. Other macro economic factors i.e. GDP found insignificant but inflation rate significant
with price to book value.
Keywords — Indian companies, capital structure decision, determinants value of firm, National Stock exchange, GDP,
Inflation.

I. INTRODUCTION III. RESEARCH METHODOLOGY

Every business whether big or small needs fund for The secondary data is obtained from money control
achieving target capital. It is necessary to understand the database, panel data consisting of selected sample of 6
use of Debt and Equity to attain best and optimum leverage. Indian media and entertainment industry companies listed
Leverage is use of fixed assets to any organization with the on Nifty over a period of 5 years from 2013-14 to 2017-18.
help of best sources of fund. However the actual capital In this study we investigate the choice of leverage.
must be neither to low nor too high than it is required. It can The previous empirical and theoretical study explores
be determined by long term capital and equity to be raised. various variables which has noticeable impact on financial
Capital structure is composition of long term debt and structure choice decision.
equity of business. It encompasses fund raised with the help
of ordinary and preference share, Bonds, Debenture, terms The panel data is set for five years to investigate the linkage
loans from financial institutions etc. Concerning with between leverage and specific factors. The panel data
decision of financing it is important to have correct picture analysis done for observations of five consecutive years. In
of need of capital and its utilization. Financing decision is this way, the sample of the study consists of 24 firm’s year
most intense decision because it directly has impact on observation. The study consist of following set of nine
profitability and solvency of any firm where to be taken by variable and form the model to examined the relationship
any organization. among dependent and independent variables.

II. NIFTY A variety of variables have been used in the empirical

The National stock exchange is leading stock exchange of studies of national as well as international companies and
India located in Mumbai.NSE was established in year industries analyzed .this study focused on impact of capital
1992.NSE was first exchange provided with fully structure on value of the firm. It directly tests the
automated screen based electronic trading system which Modigliani and Miller Approach. Following were our
offered easy trading facility. Total market capitalization variables.
was US$2.27 trillion as of April 2018 making as 11th Dependent Variable
largest stock exchange. The NIFTY 50 index is used as the
The three Dependent variable have been used in this study
barometer of Indian Stock Market in all over the world. The
are:
NIFTY index was launched on 1966. In addition
Vaidyanathan (2016) estimates that 4% of GDP of India EV (Enterprise Value) mostly research includes as
comes from stock exchange of India. NSE offers trading combination of debt and equity. It has been used by
and investment in following segments i.e. Equity, Dhankar and Boora, Chandra & Sharma.
Derivatives and Debt. We included NIFTY companies M Cap (market capitalization) it include market capital of
listed on NSE. firm and variable used by Dhankar and Boora, Chadha &
Sharma

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PB (Price to book) It shows the ratio of market price of evidence drawn by Booth et al. (2001) and Huang and Song
equity and book value. The measure is used by Ozkan , (2004).
Antoniou and Bevan.
Ho: There is no significant relation between Tangibility and
Independent Variable value of firm.
The independent variables examined: Liquidity shows the availability of current assets to deal
LEV (Leverage) various measures have been seen in against the expected obligation. According to trade off
various studies but this study includes total outside theory high Cash flow creates agency problem in
liabilities by total net Worth (TOL_TNW) and its best ratio organization. After meeting debt obligation manager has
to reflect the solvency. (Rajan and Zingales, Bevan, less cash flows and it is expected that company should have
Feidakis & Rovolis, Antoniou, Bhaduri, Charalambakis & high liquidity in order to meet high debt obligation. Hence,
Psychoyios, Shah & Jam-e-Kausar). leverage positively related to liquidity. On other way,
according to pecking order theory more liquid firm being
Ho: There is no significant relation between Leverage and possession of more internal funds and tends to borrow less.
value of firm. Therefore, leverage is expected as negative relation.
Profitability According to interest tax shield hypothesis Ho: There is no significant relation between Liquidity and
formed by Modigilani and Miller (1963), firms with higher value of firm.
profit employ higher debt to gain the tax benefit. On the
other hand pecking order theory, asymmetric information Size After examining the size of company it is found that
hypothesis of Mayers (1984) and Mayers and Majluf with large size are likely to be large debt. Therefore
(1984) refers that companies prefer internal financing than positive association is expected between size and value of
equity than debt. Firm with higher profitability employ firm. Large firm are more diversified and expected positive
more retained earnings than issuing debt. Most empirical relation with debt also. Size is measured by log of total
study confirms pecking ordertheory and found negative assets. Harris M. and Raviv A. (1990), Song A (2005),
relation between profitability and leverage.( Kester, 1986; Lima (2009) Vithessonthi and Tongurai (2015) Nikolaus (
Titman and Wessels, 1988, Rajan and Zingales, (1995) 2015) , Bevanand and Danbolt ( 2002).
Michaelas et. al. (1999), Jayaraman (2013), kartik 2017, Ho: There is no significant relation between Size and value
Chandrasekharan, (2012) , Friend and Lang (1988), Titman of firm.
and Wessels (1988), Barton et al. (1989), Rajan
Growth shows prospective of companies opportunities.
andZingales (1995), Griner and Gordon (1995), Shyam-
Growth oriented firm find difficult to rely on debt fund.
Sunder and Myers (1999), Michaelas et al. (1999),Booth et
Most of the time the companies retained earnings is not
al. (2001), Chen (2004), and Murinde et al.(2004). On the
enough to finance the prospective project. It is expected
other hand Bowen et al. (1982), Dammon and Senbet
that there is positive relation between debt and growth.
(1988), Givoly et al. (1992) and Petersen and Rajan (1994)
Growth is measured by log of percentage change in growth
have concluded that the relationship between Profitability
of total assets.( Hall et al 2004, Heshmati (2001), Kester
and leverage is positive confirming the static tradeoff
(1986), Titman and Wessels (1988), Barton et al. (1989),
theory. With more profitability leading to higher retained
Rajan and Zingalls (1995), Roden and Lewellen (1995).
earnings firms would use internal funds first, and then issue
debt and then issue equity as a last resort. Hence, with Ho: There is no significant relation between Growth and
higher Profitability the firm value should increase. value of firm.
Ho: There is no significant relation between Profitability Age Trade –off theory predicts that with passing of time
and value of firm. past reputation and obligation will increase the value of
firm. Age is considered as main factor as it is expected that
Tangibility According to tradeoff theory assets act as
older firm has higher weight age and lead to higher value.
collateral and provide security to the lenders in event of
Age is measured by the current year minus establishment
financial distress and expected to have positive relation.
year.
Collaterality also protects lenders from shareholders
conflict (Jensen and Mekling, 1976). Thus, firm with higher Ho: There is no significant relation between AGE and value
tangible assets expected to have high level of debt (Titman of firm.
and Wessels, 1988, Rajan and Zingales, 1995), Marsh
Macro factors we have included two more factors i.e.
(1982) and Walsh and Ryan (1997) Bennet and Donnelly
inflation rate and GDP growth rate. Higher inflation firm
(1993) debt Scott, 1977), Titman and Wessels (1988),
raised more debt than raise equity. Since we studied period
Harris and Raviv (1990), Rajan and Zingales (1995), Ozkan
of 10 years, we expect significant and positive relation with
(2001), Wiwattanakantang (1999), Frank and Goyal
value of firm.
(2003), Chen (2004), Gaud et al. (2005) . Moreover some
studies also reflect negative relations opposite to earlier

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Ho: There is no significant relation between Inflation FINANCIAL SERVICES, DUMMYSEC8=IT,

growth and value of firm. DUMMYSEC9= MEDIA & ENTERTAINMENT,
DUMMYSEC10= METALS, DUMMYSEC11=
Ho: There is no significant relation between GDP growth PHARMA, DUMMYSEC11= SERVICES,
and value of firm. DUMMYSEC11= SERVICES,
DUMMYSEC12=TELECOM, ε = an error term.
Industry classification may be having significant role on
capital structure decision. Very few studies are conducted V. RESULTS AND DISCUSSION
to refer industries and product effects. Somehow found A. Descriptive Statistics
significant effect (Bhaduri, S. 2002) (Mayer, 1985) (Harris
The preliminary analysis consist of descriptive statistics is
and Raviv, 1991).
given on table. It gives surprising result. The mean value of
Ho: There is no significant relation between Industry and debt ratio is 2.627451, profitability is 9.537300, liquidity
value of firm. 1.632400, tangibility 59.08524, size 10.26335, Inf
4.956900, GDP 7.433300 , Age 1.512000. Jarque-bera
IV. ECONOMETRIC METHODOLOGY test statistics fails the rejection of null hypothesis as not
normal distributions of the entire variable expect Size.

The study has been used panel regression equation to EV MARKCAP M. PRICE
examine the impact of capital structure variables on the Mean 161452.3 963.2909 5.021260
form value. Themodel equation used Median 72674.88 296.0100 3.370000
Equation 1 Maximum 3141292. 9478.690 50.71000
Minimum 0.000000 0.000000 0.000000
EVit = α + β1LEVit + β2PROFit + β3 S1 it + β4 TAN it + Std. Dev. 301564.7 1727.387 5.765012
β5 GROW_ it +β6LIQ it +β7GDP it +β8 INF it+ β9 AGE2 Skewness 5.864157 2.854168 3.597743
it + β10 DUMMYSEC1 it+ β11 DUMMYSEC2 it+ β12 Kurtosis 47.13525 10.78931 20.67392

DUMMYSEC3 it+ β13 DUMMYSEC4 it+ β14 Jarque-Bera 43447.36 1942.885 7586.302
DUMMYSEC5 it+ β15 DUMMYSEC6 it+ β16 Probability 0.000000 0.000000 0.000000
DUMMYSEC7 it+ β17 DUMMYSEC8 it+ β18
Sum 80726167 481645.5 2510.630
DUMMYSEC9 it+ β19 DUMMYSEC10 it+ β20 Sum Sq.
DUMMYSEC11it+ β21 DUMMYSEC12 it+ εit. Dev. 4.54E+13 1.49E+09 16584.45

Observations 500 500 500

Equation 2 (TABLE 1)
MCAPit = α + β1 LEVit + β2 PROFit + β3 S1 it + β4 TAN LEV PROF LIQ
it + β5 GROW_ it +β6 LIQ it +β7 GDP it +β8 INF it+ β9 SIZE
Mean 2.627451 9.537300 1.632400 10.26335
AGE2 it + β10 DUMMYSEC1 it+ β11 DUMMYSEC2 it+
Median 0.970000 6.790000 1.220000 10.29476
β12 DUMMYSEC3 it+ β13 DUMMYSEC4 it+ β14
Maximum 18.16281 77.61000 16.73000 15.04804
DUMMYSEC5 it+ β15 DUMMYSEC6 it+ β16
Minimum 0.000000 -20.44000 0.000000 6.024174
DUMMYSEC7 it+ β17 DUMMYSEC8 it+ β18 Std. Dev. 3.638682 10.24830 1.886369 1.612016
DUMMYSEC9 it+ β19 DUMMYSEC10 it+ β20 Skewness 2.091567 2.172258 3.740114 0.127138
DUMMYSEC11it+ β21 DUMMYSEC12 it+ εit. Kurtosis 6.875080 12.18723 23.13166 2.990591

Equation 3 Jarque-Bera 677.3927 2151.666 9609.113 1.348857

PBit = α + β1 LEVit + β2 PROFit + β3 S1 it + β4 TAN it + Probability 0.000000 0.000000 0.000000 0.509447
β5 GROW_ it +β6 LIQ it +β7 GDP it +β8 INF it+ β9
AGE2 it + β10 DUMMYSEC1 it+ β11 DUMMYSEC2 it+ Sum 1313.725 4768.650 816.2000 5131.677
β12 DUMMYSEC3 it+ β13 DUMMYSEC4 it+ β14
DUMMYSEC5 it+ β15 DUMMYSEC6 it+ β16 Sum Sq. Dev. 6606.763 52408.77 1775.635 1296.699
DUMMYSEC7 it+ β17 DUMMYSEC8 it+ β18
500 500
DUMMYSEC9 it+ β19 DUMMYSEC10 it+ β20 Observations 500 500
(TABLE 2)
DUMMYSEC11it+ Β21 DUMMYSEC12 IT+ εit.
TAN INF GDP AGE
Mean 59.08524 4.956900 7.433300 1.512000
HERE, EV=ENTERPISE VALUE, MCAP=MARKET Median 3.647596 4.456000 7.256500 2.000000
CAPITALIZATION, PB=PRICE TO BOOK, Maximum 1132.983 8.984000 10.30000 2.000000
LEV=LEVEARGE, PROF=PROFITABILITY, S1 = SIZE, Minimum 0.095333 2.039000 5.500000 1.000000
TAN=TANGIBILITY, GRPW_=GROWTH, Std. Dev. 143.7372 2.732885 1.277196 0.500357
-
LIQ=LIQUIDITY, GDP=GROSS DOMESTIC Skewness 3.978110 0.250474 0.758879 0.048014
PRODUCT, INF=INFLATION, AGE=AGE, Kurtosis 22.42054 1.353021 3.215531 1.002305
DUMMYSEC1= AUTOMOBILE, DUMMYSEC2=
CEMENT & CEMENT PRODUCTS, DUMMYSEC3= Jarque-Bera 9176.222 61.73933 48.95928 83.33344
CONSTRUCTION, DUMMYSEC4= CONSUMER Probability 0.000000 0.000000 0.000000 0.000000
GOODS, DUMMYSEC5= ENERGY, DUMMYSEC6= Sum 29542.62 2478.450 3716.650 756.0000
FERTILISERS & PESTICIDES, DUMMYSEC7= Sum Sq. 10309524 3726.861 813.9840 124.9280

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Dev. nt stic ue nt stic ue nt stic ue

s s s
Observations 500 500 500 500 - - - - - -
(TABLE 3) 130 9.4 0. 492 2.5 0. 794 5.2 0.
C
164 569 00 410. 111 01 204. 899 00
6. 07 00 2 94 24 2 04 00
Panel unit root test has been proposed by several - -
researchers like Maddala and Wu (1999). It’s mostly LEV
329 6.6 0. 164 2.1 0. 862 1.5 0.
49.2 541 00 86.6 649 03 6.30 142 13
referred than single time series units because approximately 0 23 00 0 64 09 7 64 06
the test statistics are approximately normally the test 399 3.5 0. 101 0.8 0. 158 1.4 0.
statistics are approximately normally distributed for the PROF 9.81 297 00 0.46 893 37 7.41 756 14
4 19 05 9 49 43 5 39 07
finite sample sizes. In this study we also used unit root test 117 11. 0. 714 4.3 0. 904 7.3 0.
to examine data is stationary or not. Firstly, it is necessary S1 405. 716 00 26.3 168 00 97.7 542 00
7 70 00 5 54 00 2 49 00
to check the stationary. The series is said to be stationary - - - - - -
when mean and auto covariance does not depend on time. TAN
245. 2.8 0. 45.0 0.3 0. 86.2 0.7 0.
011 297 00 287 038 76 835 220 47
All variable of unit root study it is found in our study at first
0 98 49 0 50 14 0 56 06
difference except Age. - - - - - -
GRO 33.2 0.2 0. 30.1 0.3 0. 49.2 0.5 0.
W_ 398 533 80 827 429 73 590 642 57
Variable t-Statistics Difference Prob 9 75 01 5 69 18 2 24 29
Enterprise value -6.73495 first difference 0.0000 - -
159 2.6 0. 703. 0.1 0. 248 0.5 0.
Market first difference LIQ
32.5 723 00 692 598 87 4.70 838 55
Capitalization -208.936 0.0000 4 06 78 2 96 30 3 74 96
Market Price -28.2153 first difference 0.0000 - -
376 0.5 0. 636. 0.1 0. 115 0.2 0.
Leverage -20.0648 first difference 0.0000 GDP
7.43 130 60 019 313 89 6.49 423 80
Profitability -18.0036 first difference 0.0000 0 28 82 4 44 56 7 63 86
- - - - - -
Size -13.5339 first difference 0.0000 366 0.9 0. 892 2.9 0. 722 2.6 0.
INF
Tangibility -14.2854 first difference 0.0000 1.50 936 32 4.76 126 00 7.60 346 00
6 05 09 4 07 38 0 98 87
Growth -29.6721 first difference 0.0000 835 3.5 0. 590 0.1 0. 132 0.4 0.
Liquidity -21.8791 first difference 0.0000 AGE2 50.4 974 00 1.45 842 85 61.6 800 63
6 69 04 6 18 39 8 37 14
Age -31.3656 Second difference 0.0000 DUM 390 0.6 0.
GDP -30.6867 first difference 0.0000 MYSE 49.7 613 50
C1 5 54 87
Inflation -12.1341 first difference 0.0000
DUM 282 0.0 0.
(TABLE 4) MYSE 6.90 418 96
For unit root test Levin, Lin & Chu conducted. The C2 7 94 66
- -
hypothesis of this test are Null hypothesis process has unit DUM
885 1.0 0.
root and Alternative hypothesis process has no unit root. MYSE
98.7 638 28
C3
Since our test has significant p-value as less than .05 1 98 79
DUM 105 1.6 0.
indicates the rejection of Null Hypothesis which means data MYSE 003. 073 10
in not unit root and result is desirable. As table attach on C4 2 17 86
- -
appendix. DUM
123 2.3 0.
MYSE
Panel Regression the result of pooled OLS, Fixed effect and C5
652. 063 02
6 50 15
Random effect each three equations is given on TABLE 6.
DUM 561 0.6 0.
After analyzing regression effect of all three fixed effect is MYSE 02.1 456 51
fit for model as Hausman test is insignificant in case of C6 0 38 88
- -
equation 1 and 3 which indicates use of random effect DUM
624 0.1 0.
MYSE
whereas in case of 2nd model p value is significant and C7
9.71 117 91
1 63 11
deliver the result of rejection of null hypothesis which DUM 191 0.3 0.
indicates the use of fixed effect. MYSE 41.3 051 76
As all the dependent and independent variable has C8 5 41 04
DUM 131 1.6 0.
stationary data and can go for regression Analysis. As table MYSE 951. 007 11
attach on appendix. (TABLE) C9 1 31 01
- -
Panel data Equation with dependent variable EV DUM
118 2.0 0.
(1)….equation MYSE
353. 545 04
C10
9 95 05
Indepe Pooled OLS Fixed Effect Random Effect DUM 694 1.1 0.
ndent MYSE 97.8 388 25
variabl C11 1 09 54
e DUM 151 0.1 0.
Coef t- P Coef t- P Coef t- P MYSE 93.5 817 85
ficie stati val ficie stati val ficie stati val C12 3 43 59

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ficie stati val ficie stati val ficie stati val

nt stic ue nt stic ue nt stic ue
0.54 0.83 0.22 s s s
R2 990 135 944
C - - - -
1 8 0 279 3.4 0. 456. 0.6 0. 162. 0.2 0.
0.53 0.80 0.21 2.56 713 00 865 958 48 862 499 80
Adjust
012 917 528 0 20 06 8 85 69 9 72 27
ed R2
7 9 7 - - - - - -
LEV
F- 27.8 37.4 16.2 55.9 1.9 0. 26.3 1.0 0. 30.5 1.2 0.
statisti 089 829 112 165 320 05 131 320 30 762 834 19
c 9 7 1 3 67 39 3 19 26 9 70 99
Prob PROF 52.5 7.9 0. 0.78 0.2 0. 1.72 0.4 0.
(F- 0.00 0.00 0.00 526 347 00 345 059 83 796 581 64
statisti 000 000 000 6 08 00 7 49 69 3 84 70
c) 0 0 0
S1 385. 6.5 0. 70.3 1.2 0. 124. 2.3 0.
D-W 0.31 0.72 0.62 330 793 00 507 699 20 523 973 01
statisti 886 329 190 3 87 00 3 11 48 7 15 69
cs 4 8 9
TAN - - - -
F test 1.18 2.3 0. 0.10 0.2 0. 0.30 0.6 0.
Hausm 16.21121 P value-1.0000 As fail to reject null hypothesis 568 430 01 652 147 83 311 371 52
an test and random is best fit and we will use random effect model. 3 11 95 8 00 01 3 74 43
(TABLE 5) GRO - - - - - -
W_ 1.35 1.7 0. 0.70 2.3 0. 0.72 2.4 0.
667 693 07 087 786 01 153 530 01
TABLE describes the result of Housman (1978) test for the 0 51 75 8 73 78 2 32 45
selection of fixed effect model or random effects model. LIQ 49.6 1.4 0. 11.5 0.7 0. 12.1 0.8 0.
Housman test for cross section random effect has Chi- 674 253 15 991 871 43 303 287 40
9 10 47 6 85 16 1 89 76
square test statistics=210.6 Chi-square d.f. =7 with p- GDP - - - -
value= 0.000. the null hypothesis of cross section random 11.4 0.2 0. 16.0 0.9 0. 11.9 0.7 0.
052 657 79 127 876 32 940 424 45
effect is rejected. In this case fixed effect estimations 6 28 06 5 49 39 2 94 81
preferred to random effect model. The fixed effect INF - - - -
17.3 0.8 0. 21.6 2.1 0. 14.4 1.4 0.
regression equation can be expressed as: 487 054 42 268 080 03 438 449 14
In case of first equation where enterprise value is taken as 2 85 09 8 21 56 9 46 91
dependent variable and other determinants of capital AGE2 - -
104. 0.7 0. 65.2 0.6 0. 73.3 0.7 0.
structure were analyzed on basis of Hausman p value found 744 716 44 148 080 54 790 025 48
insignificant i.e. 1.0000 which means null value cannot be 9 44 07 1 15 35 8 11 27
- -
rejected and random effect has to be observed. Random DUM 114 3.3 0.
effect reflects that size and inflation has significant effect MYSE 5.14 182 00
C1 3 65 10
but size is positively associated and inflation found
- -
negatively associated. Although, Hausman suggest random DUM 113 2.8 0.
effect but R square found to be very low (22.94%) and MYSE 9.45 892 00
C2 7 05 40
model is not fit and can’t explain the dependent variable. - -
When we compare of three model fixed has best fit model DUM 134 2.7 0.
MYSE 8.90 713 00
explain 83.1% and fixed effect drawn leverage ,size and C3 7 44 58
inflation found significant where inflation and leverage - -
found negatively associated and size is positively. Big firm DUM 114 3.0 0.
MYSE 6.26 020 00
is indicator of good growth of the firm this will give C4 1 54 28
positive signal to the firm and leads to increase e in value of DUM 155 4.9 0.
MYSE 8.32 729 00
firm. In this study we have also included industry for C5 4 67 00
examining the effect we tested regression model with OLS - -
DUM 577. 1.1 0.
pooled effect. R2 is 53.99 found good fit and explain 27.8
MYSE 529 371 25
% the dependent variable. The relation indicates leverage, C6 8 56 60
profit, size, tangibility, liquidity age are significantly - -
DUM 125 3.8 0.
associated where tangibility shown negatively significant MYSE 9.74 543 00
relation and other were positively associated. It is also seen C7 1 97 01
- -
that sector 5 (ENERGY) and sector 10 (METAL) are also DUM 176 4.8 0.
negatively association. MYSE 2.22 064 00
Panel data Equation with dependent variable M cap C8 9 73 00
- -
(2)….equation DUM 129 2.6 0.
MYSE 6.25 904 00
Indepe Pooled OLS Fixed Effect Random Effect C9 8 97 74
ndent - -
variabl DUM 340. 1.0 0.
e MYSE 290 107 31
Coef t- P Coef t- P Coef t- P C10 7 17 27
DUM - - 0.

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MYSE 110 3.1 00 LIQ - - - -

C11 9.83 115 20 0.09 0.8 0. 0.01 0.1 0. 0.04 0.5 0.
9 41 941 680 38 727 813 85 679 094 61
- - 9 83 58 0 08 62 5 78 06
DUM 979. 2.0 0. GDP - - - - - -
MYSE 949 055 04 0.15 1.1 0. 0.05 0.5 0. 0.12 1.2 0.
C12 4 72 55 906 276 26 543 289 59 981 580 20
0.53 0.94 0.07 6 21 00 3 23 71 4 74 90
138 238 410 INF - - - - - -
R2 3 2 7 0.35 5.0 0. 0.16 2.4 0. 0.29 5.0 0.
0.51 0.93 0.05 557 231 00 051 204 01 479 002 00
Adjust 079 480 710 5 50 00 7 06 59 2 82 00
ed R2 5 5 1 AGE2 - -
F- 25.8 124. 4.35 0.54 1.2 0. 0.47 0.6 0. 0.01 0.0 0.
statisti 106 360 762 278 166 22 425 840 49 059 179 98
c 0 6 9 9 62 43 5 16 43 2 53 57
Prob DUM 0.79 0.6 0.
(F- 0.00 0.00 0.00 MYSE 170 980 48
statisti 000 000 000 C1 0 19 55
c) 0 0 0 - -
D-W 0.14 0.73 0.64 DUM 1.02 0.7 0.
statisti 840 715 281 MYSE 120 878 43
cs 6 8 2 C2 7 60 12
F test DUM 0.26 0.1 0.
Hausm MYSE 031 627 87
an test P value-0.0476 C3 5 28 08
(TABLE 6) DUM 8.69 6.9 0.
MYSE 077 254 00
C4 6 61 00
Equation 2 is to know effect of market capitalization effect - -
on leverage. Housman test shows significant value which DUM 0.65 0.6 0.
MYSE 066 317 52
indicates rejection of null hypotheses and acceptance of C5 8 90 78
fixed effect model. When we compare all the three effect - -
DUM 1.39 0.8 0.
fixed R2 has highest 94.2 % value and good fit to model MYSE 845 378 40
and found tangibility and inflation are significant negative C6 9 19 26
impact on value of firm. In case of OLS pool effect DUM 0.94 0.8 0.
MYSE 161 766 38
leverage, profitability, tangibility, size and growth has C7 1 00 11
significant value here leverage and growth shows negative - -
DUM 0.47 0.3 0.
result. In addition except sec 6 and 10 all has association MYSE 159 913 69
with value of firm. In addition fertilizer and mental sector C8 4 70 57
DUM 1.79 1.1 0.
found insignificant. 227 318 25
MYSE
Panel data Equation with dependent variable price to book C9 9 83 83
(3)….equation. - -
DUM 0.83 0.7 0.
MYSE 406 537 45
Indepe Pooled OLS Fixed Effect Random Effect C10 9 66 14
ndent DUM 1.11 0.9 0.
variabl MYSE 251 490 34
e C11 1 19 31
Coef t- P Coef t- P Coef t- P DUM 0.95 0.5 0.
ficie stati val ficie stati val ficie stati val MYSE 243 930 55
nt stic ue nt stic ue nt stic ue C12 7 97 34
s s s 0.54 0.78 0.14
C - - 5549 384 014
14.5 5.5 0. 0.27 0.0 0. 11.4 3.5 0. R2 8 2
894 180 00 832 655 94 297 912 00 0.52 0.75 0.12
0 38 00 4 82 77 2 07 04 Adjust 5584 542 434
LEV 0.29 3.0 0. 0.30 1.8 0. 0.18 1.4 0. ed R2 0 8
164 661 00 072 245 06 038 914 13 F- 27.3 27.5 8.87
9 81 23 1 93 87 7 14 65 statisti 247 729 346
PROF 0.18 8.6 0. 0.14 6.0 0. 0.16 7.1 0. c 4 4 9
906 854 00 979 915 00 587 644 00 Prob
0 01 00 4 36 00 4 66 00 (F- 0.00 0.00 0.00
S1 - - - - statisti 000 000 000
1.02 5.3 0. 0.49 1.3 0. 0.58 2.2 0. c) 0 0 0
203 097 00 138 721 17 743 532 02 D-W 0.73 1.45 1.28
3 26 00 9 98 07 3 33 47 statisti 052 572 368
TAN - - - - cs 1 0 4
0.00 1.2 0. 0.00 0.1 0. 0.00 0.5 0. F test
200 073 22 037 156 90 134 308 59 Hausm 0.000000 chi square
8 88 79 1 49 80 9 10 58 an test P value-1.0000
GRO - - - - - - (TABLE 7)
W_ 0.00 0.8 0. 0.00 0.4 0. 0.00 0.2 0.
212 444 39 079 151 67 051 717 78
8 75 88 1 72 82 3 65 59

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 7

Equation 3 results adoption of random effect as Hausman impact of industry classification on leverage total number
shows positive significant result. Random effect shows not of firm used and categorized in thirteen industries. In our
a good fit value as R square value is 14% R2 which is very study reveals that all three model shows fertilizer industry
low and delivers profitability, size and inflation were found is totally insignificant to value of firm. Above result also
significant at 5% significance level but size and age were tally with Mayer (1985) and Harris and Raviv (1991) found
negatively associated. On the other way, fixed effect get R2 significant result.
value is 78.38 and F-statistics 27.5 % which shows the We have also done cross section test and found no cross
model is good fit and dependent variable explain the section association.
independent variable. Results indicate that inflation is
negatively significant at 5% level where profit and leverage
are positively significant at 5% and 10% respectively.
VI. CONCLUSION
Further when we include sector OLS pooled regression This study has aim to contribute to existing literature in
model discover leverage profitability and size were various ways. It is one of the study enhance the
significant at 5% where size and leverage has negative understanding of factors effecting value of firm as very less
effect. study has been conducted on whole the index while mainly
The results shows that leverage has positive relation with were conserved with specific sector mainly manufacturing.
enterprise value and price to book as support many We include macroeconomic variable as for last few years
empirical studies argued that price has positive relation with we have seen higher fluctuation in inflation and GDP in
value of firm and market capitalization has negative effect India and now necessary to include the effect of economy to
but all the model failed to consider the insignificant relation the value of firm of specific company. This is also seen that
with leverage and value of firm. Hence, we can say that tangibility has negative significant effect indicates that the
there is relation between leverage and value of firm on company’s assets are not utilized properly and it decreases
Indian industries. the value of firm.
Profitability when measured with total assets on equations Based on the findings we suggest government and
1 and 2 indicates insignificant result but equation 3 shows economist has to reform the banks policies to provide the
positive significant result. This result provides the support loan as soon as possible but due to ample of regulation
to trade off theory refer that profitable firm enjoy the credit companies neglected to have debt and we found positive
rating and due to higher profitability company follow more relation with leverage as higher debt higher will be the
use of debt than equity. value as bank only gave loan to the company which has
Size also had positive relation with firm’s value as equation higher signal or approach to government. Various cases of
1 and 2 supports empirical and theoretical base to tradeoff bad debt have been seen where companies raised fund
theory. But in case of 3rd equation size reflects negative without potential project and become sick. Government
relation but significant and give solid proof to pecking encouragement and proper analysis of prospective projects
order theory as less asymmetry information makes equity will be beneficial to developing country like India. We
assurance. Mixed result has been seen but it confirms that found negative relation of inflation and GDP with value of
size has effect on value of firm. As thirteen companies firm. As macro economic factors are uncontrollable but
included in industry and each has its own feature it’s very certain measures can be taken by policy holders to
difficult to estimate same result from each sector. minimize the adverse effect. It is also seen that all sector
Tangibility is net fixed assets to total assets it is expected has significant effect except fertilizer sector on financial
that tangibility has negative impact shows that firm is not structure decision. Perhaps, we can say that with decrease
able to utilize firm assets properly but we found expected in inflation rate purchasing power of consumer increases
result but insignificant. Growth has shown negative impact and leads to increase in consumer demand which is
in all the three equation but 2nd equation has significant directly and indirectly associated with all sectors. Demand
effect shows that Indian firm cannot utilize our assets of agricultural sector product also ignites the demand of
efficiently. Liquidity and GDP also has insignificant fertilizer. Although, all sectors are interrelated and has
relation and both positively and negatively associated directly or indirectly effect on value of firm depends on
whereas age has positive insignificant relation. The main characteristic and trend. In addition we also found that size
finding of this paper is negative significant relation of shown mixed effect as India has underdeveloped market
inflation and value of firm. where Larger and older firm face excessive cash inflow
Although, growth had positive impact on value of firm but problem and due to mismanagement the value may
against theory we found negative impact can be implied decreased. Hence, result of the study supported tradeoff
that rapid growth creates the confusion among the theory and agency theory.
outsiders. The study suffers limitation as only analyzed companies
We also include industry to know the effective and listed on nifty and also had very limited value of firm
appropriate result. For industry analysis we applied OLS measurement. In further study we can include the impact of
pooled regression on all the equation. To identify the stock return, dividend and also Tax variables. Moreover,

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 8

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