DETERMINANTS OF CAPITAL STRUCTURE EVIDENCE

FROM INDIAN STOCK MARKET

Dissertation Submitted in Partial Fulfillment of the Requirement for

the Award of the Degree of

Master of Business Administration

OF

BENGALURU CENTRAL UNIVERSITY

BY

SANKETKUMAR B H

MB18710

Under the guidance of

DR. SATHYANARAYANA

Principal

M P Birla Institute of Management

Race Course Road, Bangalore-560001
2019-2020
 DECLARATION

I hereby declare that “DETERMINANTS OF CAPITAL

STRUCTURE EVIDENCE FROM INDIAN STOCK MARKET” is the
result of the project work carried out by me under the guidance of Dr.
Sathyanarayana S in partial fulfillment for the award of Master’s Degree in
Business Administration by Bangalore Central University.

I also declare that this project is the outcome of my own efforts and that it
has not been submitted to any other University or Institute for the award of any
other degree or Diploma or Certificate.

Place: Bangalore

Date:25/08/2020 Register No: MB183710

 GUIDE CERTIFICATE

This is to certify that “DETERMINANTS OF CAPITAL STRUCTURE

EVIDENCE FROM INDIAN STOCK MARKET” Submitted by
SANKETKUMAR B H, register no. MB183710 to Bangalore Central
University, Bangalore for the award of Degree of MASTER OF BUSINESS
ADMINISTRATION is a record of work carried out by him under my
guidance.

Place: Bengaluru

Date: 25/08/2020 Signature

 CERTIFICATE OF ORIGINALITY

This is to certify that the Dissertation titled “DETERMINENTS OF CAPITAL

STRUCTURE THEORY EVIDENCE FROM INDIAN STOCK MARKET” is an original work
of Mr. SANKETKUMAR B H, bearing University Register Number MB183710 and is
being submitted in partial fulfillment for the award of the Master’s Degree in
Business Administration of Bengaluru Central University. The report has not been
submitted earlier either to this University/Institution for the fulfillment of the
requirement of a course of study. Mr. SANKETKUMAR B H is guided by Dr. S.
SATHYANARAYANA who is the Faculty Guide as per the regulations of Bengaluru
Central University.

Signature of Faculty Guide Signature of Director/Principal/HOD

Date: Date:
 ACKNOWLEDGMENT

We would like to express our sincere gratitude towards all the people who
have contributed their precious time and effort to help us, without them it would
have been a great difficulty for us to understand and complete the project.

We would especially like to thank Dr. Sathyanarayana S, our guide for

his guidance, support, motivation, and encouragement throughout the project
period this work was done. His readiness for consultation at all times, his
concern, and his assistance even with practical things have been invaluable.

Place: Bangalore

Date:25/08/2020 Register No: MB183710

 ABSTRACT

The current study aims to examine the relationship between various identified determinants
(Profitability, Tangibility, Growth Rate, Business Risk, Size and Non-Debt tax shield) and its
impact on financial leverage (CS) decisions of Media, Technology, Engineering and
Manufacturing and Food and Beverage sector in Indian Stock market. In order to realize the
stated objectives of the study the researchers have collected data from the published financial
statements of quoted firms in the Indian stock market from the above-mentioned sectors for a
period of ten years (2010- 2019). In the very first step, we tested the data by using
multico1tinearity test and then we use linear multiple regression model to investigate the
impact of chosen independent variables on CS (leverage) decisions in Indian capital market.
Later, residual diagnostic CS, such as Serial correlation test, Heteroskedasticity Test,
Normality test have been run to assess the strength of the constructed regression model.

The results show that Current Ratio, Growth rate Profitability and Size were the major
determinants of Media sector and Current Ratio, Growth Rate, Profitability, Size were the
major determinants of Engineering Sector and Current Ratio, Growth Rate, Profitability and
Size Tangibility were the major determinants of Manufacturing Sectors and as Effective Tax
Rate, Growth Rate, Size, and Tangibility were the major determinants of Technology Sector
and Business Risk, Dividend Pay-out Ratio, Profitability, and Tangibility were the major
determinants of Food and Beverage Sector. . The study revealed inconsistency in independent
variables influencing the financial leverage component, though there is statistical support for
the proposed determinants with respect to earnings and growth rate influencing the financial
leverage.
 CONTENTS

SL NO. TOPICS PAGE NO.

I. CHAPTER INTRODUCTION

1. 2 THEORETICAL BACKGROUND OF THE 1-10

STUDY
1.3 IMPORTANCE OF THE STUDY 10-11
1.4 NEED OF THE STUDY 11

II. CHAPTER REVIEW OF LITERATURE AND RESEARCH

DESIGN

2.1 REVIEW OF LITERATURE AND GAPS 12-18

2.2 STATEMENT OF THE PROBLEM 19
2.3 SCOPE OF THE STUDY 19
2.4 OBJECTIVES 19
2.5 HYPOTHESIS 20
2.6 OPERATIONAL DEFINITIONS 20-21
2.7 RESEARCH METHODOLOGY 21
2.8 SAMPLING 21
2.9 SAMPLING DESIGN 21
2.10 TOOLS OF DATA COLLECTION 21-22
2.11DATA ANALYSIS 22
2.12 LIMITATIONS 23
III.CHAPTER PROFILE OF THE SELECTED 24-31
ORGANIZATION
IV.CHAPTER 32-81
DATA ANALYSIS AND INTERPRETATION

V. CHAPTER 5.1FINDINGS 82-87

5.2 CONCLUSION 88-90
5.3 SUGGESTIONS TO THE ORGANIZATION 91-92
BIBLIOGRAPHY/ REFERENCES 93
 LIST OF TABLES

TABLE
NO. DESCRIPTION PAGE
NO.
4.1.1 Table Showing Descriptive Statistics of Media Sector 32-33

4.1.2 Inter-Correlation Matrix to Explore Multi-Collinearity of 35

Media Sector
4.1.3 Table Showing Regression Statistics of Media Sector 37

4.1.4 Breusch-Godfrey Serial Correlation Lm Test of Media 39

Sector
4.1.5 Heteroskedasticity Test: ARCH of Media Sector 40

4.2.1 Table Showing Descriptive Statistics of Engineering 42-43

Sector
4.2.2 Inter-Correlation Matrix To Explore Multi-Collinearity of 45
Engineering Sector
4.2.3 Table Showing Regression Statistics of Engineering 47
Sector
4.2.4 Breusch-Godfrey Serial Correlation Lm Test of 49
Engineering Sector
4.2.5 Heteroskedasticity Test: ARCH of Engineering Sector 50

4.3.1 Table Showing Descriptive Statistics of Manufacturing 52-53

Sector
4.3.2 Inter-Correlation Matrix to Explore Multi-Collinearity of 55
Manufacturing Sector
4.3.3 Table Showing Regression Statistics of Manufacturing 57
Sector
4.3.4 Breusch-Godfrey Serial Correlation Lm Test of 59
Manufacturing Sector
4.3.5 Heteroskedasticity Test: ARCH of Manufacturing Sector 60

4.4.1 Table Showing Descriptive Statistics of Technology 62-63

Sector
4.4.2 Inter-Correlation Matrix To Explore Multi-Collinearity of 65
Technology Sector
4.4.3 Table Showing Regression Statistics of Technology Sector 67

4.4.4 Breusch-Godfrey Serial Correlation Lm Test of 69

Technology Sector
4.4.5 Heteroskedasticity Test: ARCH of Technology Sector 70

4.5.1 Table Showing Descriptive Statistics of Food and 72-73

Beverage Sector
4.5.2 Inter-Correlation Matrix To Explore Multi-Collinearity of 75
Food and Beverage Sector
4.5.3 Table Showing Regression Statistics of Food and 77
Beverage Sector
4.5.4 Breusch-Godfrey Serial Correlation Lm Test of Food and 79
Beverage Sector
4.5.5 Heteroskedasticity Test: ARCH of Food and Beverage 80
Sector
 LIST OF GRAPHS

FIGURE
NO. DESCRIPTION PAGE
NO.
4.1.1 Normality Test of Media Sector 41

4.1.2 Stability Diagnostics of Media Sector 41

4.2.1 Normality Test of Engineering Sector 51

4.2.2 Stability Diagnostics of Engineering Sector 51

4.3.1 Normality Test of Manufacturing Sector 61

4.3.2 Stability Diagnostics of Manufacturing Sector 61

4.4.1 Normality Test of Technology Sector 71

4.4.2 Stability Diagnostics of Technology Sector 71

4.5.1 Normality Test of Food and Beverage Sector 81

4.5.2 Stability Diagnostics of Food and Beverage Sector 81

 Determinants of Capital Structure Evidence from Indian Stock Market

CHAPTER 1

1.1 THEORETICAL BACKGROUND OF THE STUDY

The most important issues in corporate finance is responding "How do firms choose their capital
structure?” In many academic and financial institutions which investigate this area, the optimum
structure of capital is for a long time a priority. It is understandable because consulting companies
can make plenty of money on how their financial structure can be changed. There are many ways
in which the company collects the required funds; stocks and bonds are the most basic instruments.
The combination of the various securities is known as their capital structure, and the combination
of the debt and equity used to fund a business can be specified. And the target composition of
capital is the optimal combination of debt, common stock and joint stock in which the company
aims to fund its investments. Every business has obligations to be handled irrespective of its
revenue or profits. Such liabilities boost sales fluctuation and uncertainty. A debt is referred to as
the risk increase impact of continuous liabilities. It is very important to consider the relation
between the structure of the capital and its determinants in determining the structure of the capital.

Theories of Capital Structure

Some of the theories of Capital Structure are as follows

• Trade off theory of Capital Structure

The theory of Tradeoff is also one of the core theories in modeling capital structures. Trade-off
implies the business's benefits and costs. The business wants to consider the investment(s) better
than the others. Many marginal costs and marginal benefits are more conservatively compared to
a option based on stakeholder preferences. Following the debate on Modigliani-Miller 's theorem,
trade-off theory was taken seriously. When corporate income tax was applied to the original
irrelevance, debt benefit was generated and tax earnings protected. Because the compensation of
debt costs is linear. This concept of Myers has been discussed in many ways. Firstly, it could not
be agreed that the purpose could be specifically determined by the imputed facts. However, this
idea was presented in different ways in several papers. Secondly, under this principle the sum of
tax is not as simple as measured. In (2003), Graham offers a comprehensive study of tax impact
literature. Thirdly, the cost of bankruptcy is also taken to be dead costs. Transaction costs are the

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next concern. It must also be considered as a gradual transition that is not achieved simultaneously.
This raises the marginal cost for longer time of change. The theory of static trade-offs, and the
other theory of dynamic trade-offs, also occurs in two theories.

Static trade off Theory:

The theory of capital structure is a theory of corporate capital structure. By principle the risk of
financial hardship is balanced against the tax security of debt. In this principle, a mix of debt and
equities exists as an optimal capital structure. In addition, under the theory of capital structure,
trade in theory relaxes some assumptions.

Static theory starts from the principle of irrelevance, but relaxes one of the theories. The theory
eliminates the idea that as businesses borrow more capital, no financial risk costs. If we through
the presumption, the WACC will not automatically be that by taking a further debt. Actually, it's
going to be there. The value added by taking on further debt is offset by the expense of financial
risk mitigation.

This is the optimum structure of the capital and the point in optimizing the value of the product.
Explained

The theory of static trade looks like

VL=Vu+ (t.d)-PV

When VL is the levied company's value, VU is the unlevied company's value, t is the marginal tax
rate and d is the debt's value. In the figure below we explain the relation between capital expense
and debt percent in the capital structure. We see the post-tax debt burden as an upward slope as
financial pressure increases. When debt rates grow, equity costs also increase. The ideal argument
is that the tax protection 's marginal gain is the total cost of financial distress.

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A method of repositioning company value and the debt percentage in the capital structure is
sometimes used to illustrate the relationship. The value of the levered firms would then be the
highest point in the curve. This is where the composition of the economy is optimum.

Dynamic trade-off Theory:

Dynamic trade-off theory takes into account the dimension of time , typically ignored in single-
period models. This theoretical approach contributes to the right financial judgment as it takes the
margin and expectation of funding for the next cycle into account. Since some businesses expect
loans or assets to be paid while the others may need to collect funds. In debt or equity form, the
necessary funds may be collected. Nevertheless, businesses usually prefer to mix the two. Kane et
al. and Brenan and Schwartz developed the first dynamic model. The consequences of risk, taxes
and insurance expense were considered in both models but transaction costs were ignored.

Because businesses respond immediately to debt and equity imbalance and retain tax gain for high
rates of low-leveraging debt firms, tomorrow's leverage will increase. In line with this assumption,
companies which today have a low debt face a potential threat of high funding. Most businesses
are eventually unable to take up the desired debt level. Corporations are less likely to respond to
short-term equities and less likely to change long-term values. Certain concepts are accepted in the
dynamic way. Today's optimal choice can also lead to a future optimum choice. In plain terms, the
organization should collect more funds and pay them in the best possible way today. However, as

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 Determinants of Capital Structure Evidence from Indian Stock Market

opposed to prior years dynamic models are largely accepted today. The definition of the role of
benefit, the mean reversal and the role of retained income has already been altered.

• Pecking order theory

Capital structure 's theory of pecking order is a corporate account theory. The idea seeks to
understand why businesses want to use one kind of financing over another. The simple theory is
that the cost of support usually rises as the amount of asymmetrical data increases. The theory of
capital structure is one of the most notable speculations of capital structure in corporate account.
The definition includes an opportunity to explain capital structure organizations. In 1984, Myers
and Majluf first suggested theory. On this page, the hierarchy hypothesis of the concept of capital
structure is clarified, asymmetric data is clarified and the models of picking order theory are tested.

The theory for pecking orders or pecking order models notes that the expense of rises in funding
as organizations, when the amount of hilter kilt data is higher, uses subsidy sources. As
organizations are raising more and more money, it is more difficult to obtain such funding. Instead,
they are obliged to turn to bank bonds and open interest. In general, these forms of subsidization
are highly costly. The accompanying order is recommended by the theory. In the first place, at
this stage, organizations would prefer to use inward funding for new equities. The alternative is to
collect new equities after the other options have expired.

The optimal capital structures

The principle of the pecking order in capital structure suggests that the optimal arrangement in
capital is motivated by the organization’s ability to fund differently. The cost of the deflated
sources of financing therefore pushes this tendency to a large extent. In particular, when there is
an increased insecurity of organization possibilities, speculators may request a higher rate of
return. Thus, the less data speculators (more asymmetrical data) have, the more they demand the
appropriate rhythm of return.

For the management of the company, such asymmetric data are limited. We obviously always
think of the money-related role of the company. This means that internal funding will be cheaper,
because it's the chosen form of financing. Next, over equity, debt is preferred. The explanation for
this is the following circumstance. The Board may flag that it considers inflated at the time when

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 Determinants of Capital Structure Evidence from Indian Stock Market

it grants new financing by giving new offers. A new duty may also be deciphered by demonstrating
that the importance figures are inflated by the administration. It would cause a decline in the value
of an offer from an administration that announces that it anticipates supporting tasks by offering
new proposals.

Pecking order theory example

For example , consider an company with a $50,000,000 investment that it wants to finance to the
pecking order. This can use 10,000,000 dollars of domestic financing which currently has no
record. It is also the least expensive form of funding since no hazard fee is charged. Additionally,
it may also increase the responsibility of the company. If the organization’s responsibility is not
lifted, it will pay a 6 percent loan fee. The company can also offer new meaning at long last. The
required value rate is 12%. Clearly, there is a remainder of these value holders. In this respect, a
higher rate of return than obligation is expected. An company will, however, prefer an
obligation, irrespective of whether the required profit rates for obligation were equal. For that
reason, financial analysts would interpret the issue of new deals as a warning that the stock is
now inflated. This clarifies why organizations regularly use comprehensive obligation measures
and are inclined towards value obligation.

• Agency Theory of Capital Structure

Costs for the entity is one of the main constraints for management and shareholders, staff and
creditors when it comes to capital structure decisions. In theory, a question occurs when
stakeholders (e.g. managers, staff and creditors) have diverging interests between shareholders.
Agency expenditures can occur in three ways in decisions on capital structures: firstly, free cash
flow; secondly, asset replacement effects; and thirdly, debt overhang issues. Managers take a
gamble by investing in a very risky project with the impact of asset replacements With regard to
the performance of the project, the lenders profit from all this and, if it fails, the debtor's shoulders
bear all the pressure.

In the case of debt overhang, debt is expensive and all project profits will be raised by the debtor
instead of shareholders. Managers consider negative NPV projects instead of positive NPV
projects. In this case. With free cash flow, the manager loses the interest of the company by
spending income into wasteful ventures (such as parks, empire building etc.) instead of returning

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 Determinants of Capital Structure Evidence from Indian Stock Market

the free cash flow to investors. Investment decisions are related and have a clear effect on the
capital structure is the key claim in agency theory.

The shareholders and managers generally arise because management can take decisions that are
not compatible with the wealth maximization objective and that are in their own interests. There
was subsequently a great deal of empirical work to chart the relationship between agency budgets
and CS decisions. Increases the company’s profitability by allowing managers to behave more
effectively in the interest of shareholders by maintaining a high level of equity and lower agency
costs. Different scholars shared this view. This contributes to high bankruptcy service expenses.
This model was later followed by other empiricists.

This principle therefore calls for CS decisions to be made in order to reduce the costs of the
organization. High leverage (debt-to - equity-ratio) lowers Agency costs and allows executives to
make decisions for shareholders by optimizing the company interest. Considering the real
importance of the CS decision and the contradictory views of different theories, the present paper
looks at the relationship between the various identified determinants of the CS and its
consequences for Indian stock debt-to - equity ratios (financial leverage). The bulk of recent CS
studies have focused on the developed economies such as the US financial markets, Britain ,
France, Canada , Australia and Japan, among other nations. Emerging economies like India have
earned little to no publicity.

Moreover, several attempts to model company leverage guidelines are carefully described in the
literature on the proposed subject. However, it still remains unclear what optimum combination of
debt and equity an company can use to fund investments. In view of the importance of CS decisions
in the real world and contradictory views expressed by different hypotheses, the proposed field
has an obvious void. Furthermore, companies in India follow different trends of raising funds to
finance their investment. Some pursue a highly offensive and conservative approach, for instance.
Therefore, the causes of this activity must be investigated.

Major Determinants

The term CS is characterized as the composition, also known as Financial Leverage (FL), of a vast
range of financial instruments, such as private equity, loans and preferential share capital. This

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 Determinants of Capital Structure Evidence from Indian Stock Market

section provides a brief summary of various factors that can influence the debt and equity ratio of
the company across different confrontational CS theories.

• Assets Tangibility (TG)

Most theories of CS claim that asset tangibility has strong financial leverage. Tangible assets may
be backed and are widely recognized as a source of lower interest rates raising debt instruments
from capital markets. When no collateral protection exists, the investors need a high interest rate,
which reduces the shareholders' assets.

Scott (1977) claims that 'through the selling of secured debt, businesses will raise their equity by
expropriating land from current unsecured creditors.' Jensen & Meckling (1976) also suggests that
debt holders can recapture their claim during the servicing of the debt by selling more collateral
value assets of the company in the event of default. Even Myers & Majluf ( 1984) argued that
firms may find it advantageous to sell secured debt. In accordance with the static exchange
principle, if the fixed capital proportion of the Total Assets (TA) exceeds that of creditors, creditors
will gain greater value by winding up their assets in the event of bankruptcy.

Many empirical studies conducted worldwide on this determinant identified a clear relationship
between debt level and asset tangibility. Some experts found that tangible asset share a favorable
relationship to bonds and represented that large companies with more tangible assets use more
debt. We also measured the tangibility factor in the same way as most previous researchers
considered the tangibility of assets as the ratio of assets to total assets.

TAN = FA/TA Where,

TAN = Tangibility of assets,

FA = Fixed Assets,

TA = Total Assets,

• Size (SZ)

Size is one of the most commonly used determinants for measuring capital structure selection. The
theory of bankruptcy costs suggests that the leverage and size of a business are positively related.

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Many studies have also shown that large corporations prefer long-term debt, whereas small
companies prefer short-term debt to finance their properties. Greater companies are less vulnerable
to insolvency in general, which decreases the risk of failure and lowers costs of insolvency Some
analysts have reported that the scale of companies and the leverage are optimistic. Also, the
principle of cost of bankruptcy suggests that the lower costs for bankruptcy, the higher debt usage.
The Static Trade-off Theory recommends the preference to equity-financing for diversified large
companies to target CS as they have a low level of financial distress than smaller or new
companies. Empirically, there are conflicting opinions between the size of the company and the
leverage where different researchers have evaluated this connection. Some practitioners have
identified a direct correlation between the size of the company and the debt equity ratio in order to
capture the element in value on the firm's leverage option. The following formula is given

SZ = Log (TA)

Where: SZ = Size of the firm Log = natural logarithm; TA = Total Assets

• Profitability (PR)

The estimated profitability-to-debt ratio depends on the approach employed. The signage
hypothesis demonstrates that the CS (the liability of the company) gives external parties an
outstanding prospectus for the Company's future. If so, the leverage and productivity aspect of a
business would be considerably fine. Accordingly, the Pecking Order Theory (POT) argues that
the decision on profitability to equity ratios takes place in an adverse light. This theory indicates
that more profitable businesses borrow less, provided that their investment needs are met with
more profits. The important advantage of those who adopt this strategy is that retained income
doesn't involve any floating costs and managers are aware of their company's potential prospects.
In this definition, the debt-to-equity-profit ratio is a negative correlation. Studies in India and
Nepal have also backed this view. Only a few empirical research supported the case for a static
trade-off hypothesis. Some experts recommended that debt productivity be increased. We believe
that companies with higher profitability would benefit from increasing their debt from additional
taxes.

Profitability is therefore specified as return on assets in this study = EBIT/TA

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Where: EBIT = Earnings before Interest and Taxes and TA= Total Assets

• Growth Rate (GR)

There are several different theories that explain the links between growth and debt equity (leverage
component). The company's assets can be categorized in two categories as tangible and intangible.
Inconsistency is called the speed of business growth. A company with high intangible assets can
not guarantee that financial market debt funds would come from such insurance-related assets.
Therefore, businesses with a strong growth outlook would likely not raise debt first and the
correlation between growth and the indebtedness ratio is inverse. The market to book ratio (M /
BV) was used in an analysis by other analysts in the G7 countries to contribute to development.
Some experts backed this finding through observational studies. However, other experts denied
this link to leverage.

Nevertheless, the ordering principle differs from the principle of organizations' expenses. The
hypothesis seems specifically connected with FL and GR, which implies a higher growth rate
requires more resources and can be funded by external borrowing. This principle is that businesses
typically opt for asset financing, and then the borrowed funds through retained profits are the
second option, and finally, the issue of new capital resources. The Pick Order Theory therefore
recommends that rising firms have a high CS debt ratio relative to stable or increasing firms.
Various researchers carried out an empirical study to conclude that businesses with a fast growth
rate prefer low debt. Some studies have projected a direct correlation with short-term loans and a
contrary growth rate with only long-term loans.

The growth rate as described in this study: GR = (TAn– TA0)/ TA0

Where, TAn = total assets at the end of the study period and TA0 = Total Assets at the beginning
of study period

• Business Risk (BR)

Many models of volatility were applied through empirical research studies, including natural
fluctuations in the economy, corporate cash flow and changes to the operating income to determine
the relation. Companies are more likely to have high profit and cash flow volatility than when they
have earnings that are smaller than debt exposure and default in debt management. Different

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 Determinants of Capital Structure Evidence from Indian Stock Market

theories therefore suggest that the smaller the company's profit, the more likely it is to struggle
when it serves debt funds and the more likely it is to fail. The problem with the company, where
debts are placed in the context of the CS, is the relationship between shareholders , creditors and
management. The problems of the Agency have a positive effect on these contradictions. The
agency 's costs influence a CS product. High-income firms empirically favor equity funding over
debt when facing alternatives from outside funding. The corporate risk therefore replaces the
chance of failure and shares an inverse leverage. This view, backed by work by other scientists, is
likely to be lowered when there is an rise in market risk (volatility). Nevertheless, research in India
and Nepal challenge organization’s definitions of costs and bankruptcy hypotheses.

This study thus defines corporate risk as the standard difference among operating cash flows.

BR = SD (OPCF)

• Non-Debt Tax Shields (NDTS)

Organizations with high leverage CS components provide additional interest tax protections,
which represent the allowable costs of tax law. Nonetheless, NDTS ranks second with Pecking
Order Theory (POT) and ranked retained revenue first in international funding. Profitable firms
typically have POT-based financial surpluses. Whenever necessary, firms use the surplus from
domestic sources to provide their financial needs. In empirical studies in this field, however, there
were conflicting findings. A marginal tax rate is defined as the current and expected future tax
value of an additional income received today.

In this analysis, NDTS is therefore identified as the ability for a company to purchase non-long-
term interest loan tax deductions on depreciation and interest payments.

Non-Debt Tax Shield is given by OI – I - T/0.33

Where, OI = operating income, I = represents income and T = income tax payments.

1.2 Importance of the Study

This topic maximizes the share market price of the company by increasing earnings per share of
shareholders. The owner also increases the receipt for the dividend. It increases the capacity of
the organization to recognize potentially wealth generating opportunities. The confidence of debt

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suppliers is also enhanced if capital is properly handled. It increases the nation's revenue and
growth by increasing the company's capacity to invest in the development of potential properties.
This maximizes the company's share market price by rising the common shareholders' earnings
per share. The shareholder dividend receipt is also growing. This decreases the operational costs
or funding costs of the company. By developing a appropriate mix of sources of funding, an
company can achieve a lowest overall capital expense.

1.3 Need of the study

For this reason, the impact of leverage and insider ownership on the policies of corporate capital
structures has been immensely carried out and the significant link between capital structure and
so on has been investigated. There are only very few studies that aim to explore the connection
and its impact on media, engineering, manufacturing, technology and food and beverage
financial leverage decisions between various determinants identified (profitability, tangibility,
rate of growth, business risk, sizing and non-debt taxation). Any organization's primary aim is to
maximize shareholder capital by creating greater income. And it is impossible to achieve
sustainable and reliable profit growth without efficient cost control. The Capital Structure and its
analysis derive importance from this prevailing necessity. The fact that it is usually less
expensive to get debt financing compared to equity results in deciding on a suitable structure of
capital. The optimal framework for capital strikes a balance between risk and returns, in order to
optimize stock prices and high capital costs.

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 Determinants of Capital Structure Evidence from Indian Stock Market

CHAPTER 2

2.1 LITERATURE REVIEW

Indian Studies

Garg & Shekhar (2O02)- The debt structure of the business is also studied between 1988 and
1998 by top companies from four industries. The main purpose of the analysis was to emphasize
the impact on the debt-equity ratio of the determinant of capital structure-asset asset collateral
value, debt service capacity, earnings rate, career, business risk and corporate size. The results
showed that the most significant considerations for deciding the capital structure were asset
composition, asset collateral, existence and scale. There was no major business risk in determining
the company's leverage.

Bhaduti (2002) - Having completed a significant report on Indian Private Sector Capital
Structures. For the purposes of the analysis, the data was obtained from the CMIE database and a
sample of 363 companies from 9 different industries were chosen. The research period was six
years between 1989-1990 and 1994-1995. Exploratory factor analyzes have been used to evaluate
the effect on the capital structure of the business of the different attributes-asset structure, non-
debt tax shields, size, financial distress, growth, productivity, age and age. Three indices of
leverage expressed in book values-gross borrowings and long-term borrowings and short-term debt
to the total ratio of assets-were used to assess various debt ratios according to their maturity
structure. The study shows that the choice of Indian companies for an optimum capital structure is
strongly influenced by factors like scale, production, cash flow, uniqueness and characteristics of
industry.

Rao & Lukose (2002)- Empirical evidence generated by the Capital Structure Determinants of
listed non-financial Indian companies on the basis of a comparative study dividing it into both pre-
liberalization (1990-1992) and post-liberalization (1997-1999). The research group was 498 pre-
liberalization companies and 1411 post-liberalization companies. Two leverage and business
leverage metrics were employed in the analysis. The research focused on explanatory variables on
different theories of capital systems, namely the tax theory, the signaling theory and the theory of
the organization. The explanatory variables used and representing agency expenses, non-debt tax

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shields, tangibility, profitability, 47 market risk, development, growth and size were used to
examine the determinants of the capital structure, the regression models were used, and the
profitability was not observed; During the post-liberalization period, size and business risks were
important. The effects of taxation and reporting on actions, business expenses and funding of large
companies and international businesses play an significant role in funding them.

Bhole & Mahakud (2004)- Tendencies analysis Capital Structure of public limited companies in
the Indian and private limited companies in the period 1966-2000 and empirical analysis of the
Capitable Structure Determinants of 330 public limited companies by using the panel data model.
The parameters chosen for the analysis were: borrowing rates, equity rates, duration, productivity,
growth rate, asset leverage, liquidity and non-debt tax shields. It was found that the corporate
leverage increased dramatically over time. In the case of public limited firms, debt dependence
was higher than private limited firms. In the Capital Structure Decision of companies in India,
borrowing costs, equity costs, size, asset collateral value, liquids and debt-free fiscal shields have
been found to be significant factors.

Gupta (2004)-The structure of the asset financing patterns of the Indian businesses and the impact
of the 210 Public Ltd enterprises representing the 17 industry sectors in India have been studied,
including tangibility, volatility, profitability, size, production, non-debt tax shields and flexibility,
on the capital structure decisions. The research was conducted between 1992 and 2000. For
assessing purposes two leverage metrics – long-term net-value debt and the total net-value
liabilities were used. By means of multiple regression analyzes, Indian businesses have found that
determinants were industry-specific, and tend to finance fixed assets with debt sources compared
with equity. Volume was not substantial, earnings volatility was directly connected with leverage.
The truth is that small companies have greater access to equity sources means that they rely more
on debt than large corporations. Non-debt tax shields and stability were connected positively to
debt ratios, and productivity was negatively associated. He indicated that financial managers in
India have to factor in and evaluate different sectoral characteristics carefully, before attempting
to achieve their optimal capital structure.

Das & Roy (2005)- Analyzes the inter-industry difference in Indian companies' capital structure.
This study was carried out in 20 years, respectively, between pre-liberalization (1979-1990) and
post-liberalization (1992-1999). Their sample consisted of companies from twelve Industries, and

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the unbalanced category of businesses using them and, thus, the overall number of companies
varied over time. The methodology used was a single-way cross-sectional variance analysis. They
tried to examine whether variations between industries' capital structure occur because of
variations in the ages of companies. They also examined the effect of the dimensional classification
and tried to determine whether industries play a role in the differences between capitalistic
structures. They concluded that both company sizes and classifications contribute to changes in
capital structure, and a potential source for existing variation is differences in the Fund
requirements for groups based on the technology used.

Guha & Kar (2006)- Over a period of 12 years 1992-2004, a panel study was carried out for India
by 450 listed Indian firms. Capital structure determinants included growth rate, age, stock price,
capital structure, scale, classification of the industry and long-term borrowing. The research used
two leverage metrics-Analysis of fixed deposits, commercial paper and debenture and full debt to
Total assets. The author concluded that both leverage metrics rely on the company's long-term
funding and sales success through panel data regression analysis.

Majumdar (2009)- Collection of 115 companies belonging to India's 50 largest company houses
from 1999 to 2006 were used to investigate the determinants of long term borrowing of the group's
Indian affiliates. They tried to find out how Group-affiliated companies' borrowing actions in an
internal group market varied substantially from what economic theory offers. Data regression
panel models were used to assess the effects on long-term debt borrowings of affiliates in India of
tangible, profitability, size, growth opportunities, unicity, non-debt tax shield and age. They
assumed that group membership could lead to changes in the borrowing behaviour of companies
with internally operating capital markets in terms of firm size , growth and the uniqueness of the
tax shield and non-debt. Nevertheless, the results for age, tangibility and profitability showed, as
hypothesized in theory, that the relationship between these variables, borrowings and non-group
companies was no different.

Foreign Studies

Song (2005)- The determinants of Swedish companies' capital structure were studied on the basis
of a panel data collection from 1992 to 2000 of 6000 firms. Three leverage ratios-the ratio of full
debt to capital, short-term debt to capital and the long-term debt to capital-were used in his

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research. He studied. The determinants of the capital structure used in the analysis were –
tangibility, debt-free tax cover, productivity, scale, anticipated growth, uniqueness. Determinants
of the capital structure have been studied by panel data regression analysis (fixed effect panel data
model). The author concluded that the determinants of the three leverage measures are
significantly different. All three types of debt were similarly measurable, lucrative, substantial and
income volatility. The debt-free tax protection was applied to short-term and long-term debt only.
Everything in the three debt acts is connected with individuality and development. Important
variations occurred in all three situations between short and long-term debt levels of 39. While
tangible relationships to long-term debt and overall debt were positive, this related negatively to
short-term debt. The non-debt tax shield had a favorable impact on the long-term debt ratio, while
the long-term debt ratio was negatively associated. Only the total debt ratio and short-term debt
relationships were positive, and the long-term debt ratio had a negative impact. The author
concluded that most of the capital structure determinants as indicated by the theories of capital
structure seem important to Swedish firms.

Gonenc (2005)- A comparative debt financing analysis has been carried out between foreign and
domestic companies in Turkey, Germany & Great Britain. Companies with foreign sales of more
than or equal to 10% of the overall net sales ratio as international and domestic companies have
been classified as those with a foreign sales ratio of below 10%. The study's main objectives were
to compare debt ratios between foreign and domestic companies and to assess if the debt financing
effect of determinants on both groups differed. The study period for Germany and the UK was
covered from 1995 to 1999 and for Turkey from 1995 to 2001. The selected variables were
volatility (risk), competitiveness, scale, tangible fixed assets, growth chances, tax debt security,
the presence of controlling shareholders, and the classification of industry. Total debt to total asset
ratio was the leverage factor. The analysis was based on multiple regressions and chow tests. The
key results were that Turkish foreign companies are using higher total debts than domestic
companies, but German and U.K. companies were not backed or validated by such facts. Better
monitoring mechanism and decreased agency costs were applied by controlling shareholders in
Turkey, while agency issues were created in Germany. Specific factors such as risk, profits and
fixed assets have a greater negative impact than domestic companies on debt financing for
international companies. The existence of opportunities for growth increases the international
companies' debt ratios. Global Turkish companies are rising their debt funding to a fixed rate. In

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comparison with domestic firms, the results did not explain the increased level of debt financing
for Turkish international companies.

Jong etal (2005)- Comparative research was carried out on the effect of global factors and country
factors on the capital structure of companies in 42 countries worldwide, including India. The
duration was five years from 1997 to 2001. The book value long-term debt and the gross asset
market value long-term debt are two leverage ratios to check the particular variables of the
business. The leverage of company 40 specific tax, tangibility, scale, income, risk, growth and
liquidity determinants Company 40 specific Leverage determinants includes: business/banking
system, borrowers' protection, shareholder rights, bond market development, stock market
development, legislative implementation, corruption, GDP growth, trade openness, capital
accumulation, interest rateThe methods used to estimate the effect on cross-border activities of
specific company factors such as corporate tangibility, size, risk, growth and profitability were
concluded with the normal LSQ regression, F, chow testing and seemingly non-related regressions
(SUR). The structure of capital is essential and consistent with traditional capital structure theories.
Country-specific factors impact leverage opportunities globally and should be addressed in the
analysis of the capital structure of a nation.

Buferna etal (2005)- Proof of Capital Structuring Determinants from Libya is presented through
the study span of the offive years from 1995 through 1999 using a panel sample of 55 companies
(32 public corporations and 23 private firms). The study contains three leverage metrics – overall
debt, short-term debt and long-term debt, both of which have been scale-down by total assets, both
financially stable companies and financially distressed. The effect of four explanatory variables-
tangibility, scale, productivity and potential growth on leverage – was investigated by cross-
sectional, ordinary least square regression analysis to classify the theories of the capital structure
applicable in the Libyan context. There was no evidence to support Information Asymmetry
Theory, however, that both static trade-off theory and agency cost theory were important theories
for the Capitals System of Libyan companies.

Akhtar (2005) - The importance of the Australian multinational (MC) and domestic corporations
(DC's) determinants of the capital structure during the period from 1992 to 2001 was checked. The
survey companies picked 97 (DC's) and 122 (MC's). The leverage metric has been described as
the book value ratio between long-term debt and long-term debt book value and equity market

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 Determinants of Capital Structure Evidence from Indian Stock Market

value. In the context of this analysis, the determinants identified were: debt costs, bankruptcy
expenditures, non-debt tax security steps, competitiveness, duration, asset collateral. The industry
effect was also analyzed and the time shift in the impact on capital structure was investigated.
Further multinational companies 41 were examined and their impact on the capital structure of
companies was evaluated, with determinants such as diversification, foreign exchange risk and
political risk. It has been found that growth, productivity, and size are essential determinants of
leverage in both types of company using the Tobit regression model for analysis. DC had a
substantial asset collateral value. In terms of global leverage compared to domestic leverage,
bankruptcy costs and profitability were high. Higher diversification rates have reduced the
leverage. The leverage was not clarified by foreign exchange risk and corporate political risk.
There was no clear industry impact among domestic and multinational companies, but the
importance of the original determinants was constant and certain industries became relevant when
the industry effects were considered. During studying the effect on time variability, the leverage
and capital structure determinants were found to differ across domestic and transnational
companies during the sample period.

Seetanah et.al (2007)- The capital structure determinants of 38 companies listed on the Mauritian
Small Island Developing State stock exchange were investigated over the period between 1994
and 2004. Returns by panels have been used to capture the effect of productivity, shaped,
tangibility, growth potential, risk from business, tax shields and liquidity on leverage. The research
used two acts of control-the overall liability ratio (Total liabilities / Total liabilities + book value
of equity) and long term Debt ratio which was defined as (Total liabilities current liabilities / Total
liabilities - Current liabilities + book value of equity). The results suggested that productivity,
scale, tangibility, and liquidity are the main determinants of Mauritius' capital structure.
Profitability and liquidity have been negatively associated with leverage support to pecking order
theory and growth has been positively associated with it. Weight has also been linked to the trade-
off principle leverage. The authors concluded that the theories of capital structures may clarify in
part the financial structure of Mauritius-based companiesThe study showed that insights from the
modem finance theory also extend to Mauritius, given discrepancies between advanced states like
the US and developing countries like Mauritius as some company particular factors were important
for understanding the capital structure of firms in Mauritius. Research at industry-level divided
showed that there was no variation in capital structure determinants across industries.

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Dragota & Semenescu (2008)-Capital Structure analyzes for the period 1997-2005 of Romanian
bundled firms. It was intended to establish whether the asymmetry of information had an effect on
Romanian capital markets through the capital structure. It was also possible to decide whether the
theory of signaling or the theory of the Pecking Order could help explain Romanian companies'
capital structure policies. Three leverage ratios were employed: equity / total assets (absolute
leverage), total financial debt / total assets and total commercial debt / total assets. Tangible assets,
scale, productivity and growth opportunities were the determinants selected for the analysis. With
an analysis of regression, the company found that profitability and tangibility were linked
negatively to leverage and size positively to financial debt, while commercial-debt growth
prospects were linked adversely to all leverage levels, according to the Market to Book ratio. The
study found that the knowledge asymmetry problem threatened the Romanian market for equity,
then commercial debt and, eventually, the financial debt, and that Romanian listed companies kept
their assets in the order of first equity. The listed companies in Romania structured their funding
strategy more according to the principles of the pecking order theory rather than that of signaling
one.

Hecht & Haye (2009)- It is desired to investigate empirically whether Capital Determinants are
important even for firms in mature capitalistic economies in China and India and whether bundling
models are capable of capturing the variation of the firm leverage through time and place. For the
period 2000 to 2007, they collected company-level data from the Thomson Financial World Scope
database on American , Asian (Chinese, Indian, Japanese) and European (French, English and
German) businesses. They examined the impact of risk and investment opportunities on the
leverage ratios measured by total debt to total assets, asset tangibility, size, products' uniqueness,
non-debt tax shields and returns. In order to capture both country and sector impacts, control
variables were used. In the case of pooling and panel models they find findings compatible and
the findings showed that corporate levies were positive with the tangibility and measurements of
properties, but negative with commodity singularity and are generally not linked to either
company-level rent ability or non-tax debt shields. Their argument was that the static theory of
trade off offers the best reason for the capital structure of firms spread around geographical regions
around the world.

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2.2 STATEMENT OF THE PROBLEM

Financial managers face the biggest challenge in selecting the best return-bearing capital
structure. The optimal capital structure is the perfect combination of debt and equity in the
capital structure. The value of a company depends on its expected revenue stream and is
determined by the correct rate of return or capital cost of the company for the flux of discount
sales. The decision on capital structures will influence the valuation of the business through a
change in expected earnings or capital cost. Once they settle in on the corporate capital structure,
financial managers need to learn the key drivers of the capital structure and its effect on the
capital structure.

The valuation of the market and the profitability of the corporation depend on the cost of the
capital, again depending on the composition of the capital and different variables such as
efficiency, tangible characteristics, growth rate, duration, non-debt tax shielding and corporate risk
decide the capital structure. S0 policymakers want to know about the deciding effects of the capital
system and its effects on the distribution of finance.

2.3 SCOPE OF THE STUDY

This research has been conducted to help policy makers discover the factors that impact the
financial structure of the company and affect the company’s evaluation.

2.4 OBJECTIVES OF THE STUDY

1. To know how the capital structure is linked to various determinants.

2. Identify the capital structure of main determinants.

3. To assess the impact of determinants (profitability, tangibility, rate of growth, scale, non-debt
tax protection and market risk)

4. To determine the impact of determinants on Five different industries' capital structures such as
Media, Manufacturing, Technology, Engineering, Food and Beverage.

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2.5 HYPOTHESIS

H0: There is no significant relationship between the Business risk and the Debt Equity Ratio.

H0: There is no significant relationship between the Liquidity and the Debt Equity Ratio.

H0: There is no significant relationship between the Dividend Payout Ratio and the Debt Equity
Ratio.

H0: There is no significant relationship between the Effective Tax Rate and the Debt Equity Ratio.

H0: There is no significant relationship between the Growth Rate and the Debt Equity Ratio

H0: There is no significant relationship between the Non-Debt Tax Shield and the Debt Equity
Ratio.

H0: There is no significant relationship between the Profitability and the Debt Equity Ratio

H0: There is no significant relationship between the Size and the Debt Equity Ratio.

H0: There is no significant relationship between the Tangibility and the Debt Equity Ratio.

2.6 OPERATIONAL DEFINITIONS

Dependent Variable (Y)

The total debt-to - capital ratio is established. The overall debt is both short-term and long-term
debt that bears interest. The net worth and overall debt of the capital workers includes

Independent variables (X)

i. Profitability: Return on total assets is specified in terms of profitability

ii. Tangibility: defined as the relation between fixed assets and total assets

iii. Growth Rate: It is defined as a compound growth rate of total assets.

iv. Size of the Firm: It is defined as the logarithm of total assets of the firms.

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v. Non-debt tax shield: Is incentive that firm acquire from tax deduction against depreciation and
interest payments other than long term interest loan.

vi. Business risk: It is defined as the standard deviation of operating cash flow.

2.7 RESEARCH METHODOLOGY

2.7.1 Type of Research

Quantitative, historical and observational forms of research. Quantitative as relationship is

analyzed by calculated variables, as the facts and current information are used for research, and
also historical as historical information is used for analysis and interpretation. For this analysis,
the relationship between multiple independent variables and the dependent variable was explored
by Multiple Regression.

2.8 SAMPLING

The sample size is 10 years for this analysis. The data sample selected is an annual financial
summary of companies from five industries, namely manufacturing, technology, food and
beverage, media and engineering.

2.9 SAMPLING DESIGN

a. Sampling unit - Companies listed on National Stock exchange (BSE)

b. Sampling size – In this study from Media-40 Companies, Manufacturing 100 Companies,
Engineering- 90 Companies, Technology-80 Companies, Food and Beverage – 50 companies has
been selected from 5 different sectors which are listed in National stock exchange.

2.10 TOOLS FOR DATA COLLECTION

Primary Data

Since the research is on the secondary data on the stock index, there is no primary data involved.

Secondary Data

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In this study data of 10 years (2010-2019) Financial of Companies listed in Stock Exchange will
be collected from Five different industries through online business news websites. Since these data
was already published in the official websites and to the public it constitutes secondary
information. This study is based on secondary data.

Income statements of companies under study

Balance sheets

Historical stock prices

Data obtained

Figures and facts

Unclassified raw data.

2.11 DATA ANALYSIS

In order to analyze the collected data and interpret the results there of, suitable statistical tools like
Inter Correlation study and Multiple Regression are used. Multiple Regression is used to study
the relationship between Debt equity ratio and Independent variables (Profitability, tangibility,
Growth rate, Size, Non debt tax shield and Business risk). Inter correlation is used to study the
correlation between independent variables.

Descriptive Statistics is used to describe the pattern of dividend payout, Debt equity and the return
on shares descriptive statistic (in the count noun sense) is a summary statistic that quantitatively
describes or summarizes features from a collection of information while descriptive statistics (in
the mass noun sense) is the process of using and analysing those statistics. Descriptive statistics is
distinguished from inferential statistics (or inductive statistics) by its aim to summarize a sample,
rather than use the data to learn about the population that the sample of data is thought to represent.
This generally means that descriptive statistics, unlike inferential statistics, is not developed on the
basis of probability theory, and are frequently non-parametric statistics. Even when a data analysis
draws its main conclusions using inferential statistics, descriptive statistics are generally also
presented.

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Statistical model used: The model used here is multiple - regression model.

The regression equation for the study is as under. Y = a + b1 X1 + b2 X2

Y = Debt Equity Ratio = α + β1 Business risk + β2 Liquidity + β3 Debt Equity Ratio + β4 Dividend
pay-out ratio + β5 Effective Tax Rate+β6 Growth Rate + β7 Non debt tax shield + β8 Profitability
+ β9 Size+ β10 Tangibility + ε

Where α is the intercept of the equation

β1, β2 ……. β10 coefficients of the equation

ε = error term

2.12 LIMITATIONS OF THE STUDY

1) Time restraints.
2) Some companies do not have all the financial statement i.e Ratios.
3) Some company’s financial statements are available for limited Years.
4) This is only for the study purpose; this will not approach any investors to take investment
decisions.
5) The subject matter analysis is limited to 5 Indian stock market sectors only.

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CHAPTER 3

PROFILE OF THE SELECTED ORGANIZATION

3.1 PROFILE OF THE ENGINEERING SECTOR:

(Conversion rate taken- Re 1=US$0.01402)

The Indian Engineering sector has experienced a substantial growth of its infrastructure and
manufacturing investments over the past few years. The engineering sector is of strategic
significance to the Indian economy and is closely associated with manufacturing and infrastructure
industries.

Market size

The capital goods industry is expected to have a turnover of up to 70 billion dollars in 2017. India
primarily exports its manufactured goods to the United States and Europe, representing more than
60 percent of total exports. For the same FY19 period, the exports of engineering in the same time
last year were USD 81.02 billion compared with USD 76.20 million. Exports from engineering
rose to $81,02 trillion in FY19 at 6.32 per cent year-on-year. In FY20 (until January 2020),
engineering exports exceeded US $64.03 billion. During FY10-19 exports of electrical machinery
increasing by CAGR by 8.94%. In the FY20 (up to January 2020) this stood at 7.39 billion US
dollars. In 2017-2018, the electricity industry saw a record growth of 12.8 percent over seven years
as government spending on the electric power project and programmers of rural and household
electrification increased.

India is expected to grow by over 18 percent in construction equipment industry in 2018-19.

Investments

Throughout India, engineering has an immense importance in terms of manufacturing prices,

development and creativity. International companies enjoy competitive advantages. The above has
encouraged many foreign investors to invest in India along with favorable regulatory policies and
growth in the manufacturing sector.

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In the period April 2000 to December 2019 FDI inflows into India's various mechanical and
engineering industries amounted to around $3.63 billion as reported by the DPIIT, the Department
of Promotion and Internal Trade (Department for the Promotion of Industry and Internal Trade).

• Joysons Safety Systems (JSS) has announced in June 2019 the merger of its two joint
ventures in India into the Joyson Anand Abhishek Safety Systems Private Limited
(JAASS) Tri-Party Joint Undertaking.
• • KEC International orders Rs 1.520 crores for various vertical business bags in December
2019 (US$ 217.48 million).
• ELGi Compressors USA, Inc. has purchased Michigan Air Solutions from Dec 2019, a
subsidiary of Elgi Equipments Limited, a worldwide supplier of compressed air solutions.
• L&T Technology Services has promised several million dollars in European infrastructure,
construction and building services programs by December 2019.

Road Ahead

The capital goods sector's turnover is forecast to rise by 2025F to US$ 115,17 billion. The Indian
market in engineering research and development is projected to grow from $28bn in FY18 to
$42bn by FY22. Building facilities are projected to rise from 4.3billion U.S. dollars in 18 FY to 5
billion U.S. dollars in 2022 respectively, and construction equipment revenues are projected to hit
90.115 billion in 2022 respectively. In India, investment in infrastructure will take Rs. 235 billion
(USD 3.36 trillion) over the next ten years.

Tech goods are expected to be exported US$ 200 billion by 2030.

3.2 PROFILE OF THE TECHNOLOGY SECTOR:

(Conversion rate taken- Re 1=US$0.01402)

In India, the global supply market continues to expand at a higher rate than in the IT-BPM sector.
India is the world's largest source of services for the US$ 185-190 billion global services supply
industry during 2017‐18 and accounts for approximately 55% of its market share. In some 80
countries across the globe, Indian IT and ITeS companies have built over 1,000 global distribution

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centers. At about 75% of the global tech talent present in India, India has become the world's
digital technology center.

Market Size

In India, the IT BPM industry in 2019 grew 6.1% year on year to 177 billion USD and by 2025
the size of the industry is expected to be 350 billion USD. India has grown to 191 billion dollars
in 2019-20, in IT and IT sectors. Industrial exports grew to 147 billion US dollars in FY20 and
domestic sales (including hardware) to 54 billion US dollars. As of FY20, The workers have been
4.3 million.

In 2020, IT spending in India decreased to 83.5 billion dollars.

The digital segment 's revenues are predicted to account for 38% of the industry's projected sales
of $350 billion by 2025.

Investments/ Developments

Indian IT has drawn substantial investment from major countries in their core competencies and
strengths. Between April 2000 and December 2019, the computer software and hardware industry
in India attracted USD 43.58 billion from cumulative FDI inflows and ranked second in The
Department of Industry and International Trading (DPIIT) has confirmed the FDI inflows.

In order to build differentiated offerings, leading Indian IT firms, such as Infosys, Wipro, TCS and
Tech Mahindra, are diversifying their offerings to demonstrate leading ideas on the block chain,
artificial intelligence to clients across innovation centers, research & development centres. The
following are some of the key developments in the Indian IT and ITeS sector:

• In January 2020, Nippon Telegraph and Telephone, a French technology firm, revealed its
plans in the next four years to spend most of its $7 billion global data center commitments
in India.
• Tata Consultancy Services in February 2020 rewarded the Walgreens Boots Alliance
pharmacy firm with Rs10,650 Crore ( US$ 1.5 billion).
• In FY20 the industry has a gross export income of 99 billion dollars.
• Contino was purchased by the UK based software consulting company Cognizant.

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 Determinants of Capital Structure Evidence from Indian Stock Market

• In May 2019, Infosys acquired US$ 143.08 million in a stake of 75 percent in Stater subsi
diary 0f ABN AMRO Bank.
• The L & T Corporation bought Mindtree in June 2019

Road Ahead

India is the world 's largest IT companies offshoring destination. Emerging technologies now
present a whole new range of prospects for top IT companies in India, having demonstrated their
capacity to provide services to both onshore and offshore customers. The industry's export
revenues are estimated to rise by 7-9% year on year. It is anticipated that by 2025 the industry will
rise to US$ 350 billion and that BPM will account for US$ 50 to 55 billion of total profits.

3.3 PROFILE OF THE MANUFACTURING SECTOR:

(Conversion rate taken- Re 1=US$0.01402)

Output has emerged as one of India's high-growth sectors. India's Prime Minister, Mr Narendra
Modi, unveiled 'Make in India' to bring India on the world map and to give the Indian economy
global recognition. By the end of the year 2020. India is expected to be the fifth largest producer
country in the world. In 2022, the State is planning to hit GDP 25% and 100 million new jobs.

Market Size

The Gross Value Added (GVA) of the production sector in India, based on the annual national
income published by the Government of India, grew 4.9 per CAGR in FY 12 and FY 20 at basic
current prices. Gross Value Added (GVA) is forecast at US$ 403.47 billion in the FY19PE, based
on current rates. Simple Prices for H1 2019–20 quarterly GVA rose by 0.4% compared to 13.9%
in H1 2018–18.

The Make in India initiative aims to make up 16 per cent of the production sector's share of the
gross domestic product (GDP) by 2022, and create 100 million jobs by 2022. Indian manufacturing
continues to have favorable market conditions. In April-January 2019-20, the production portion
of the IIP stood at 130.8 and increased by 0.3% year on year. The export of Indian goods is forecast
to be 265,26 billion dollars in April-January 2019-20.

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 Determinants of Capital Structure Evidence from Indian Stock Market

Investments

With the support of Make in India, India is on the road to becoming a hub of high-tech
manufacturing, as world giants like GE, Siemens, HTC, Toshiba and Boeing have built or are in
preparation for establishment of manufacturing facilities in India, which are attracted by the more
than a billion customer market and rising buying power in India.

In the manufacturing industry of India, cumulative Foreign Direct Investment (FDI) in April 2000-
12 2019 exceeded $89.15 billion.

• In the manufacturing sector India has been one of the most desirable investment
destinations. In recent times, some of the big investments and developments in this field
are:
• In March 2020, Oricon companies entered into a joint venture with the Tecnocap Group,
headquartered in Italy, to create a new lug cap manufacturer, Tecnocap Oriental.
• Mumbai was given its first metro trainer developed in September of 2019 under a 'Make-
in - India' initiative by state manufactured Bharat Earth Movers (BEML).
• Mumbai now had the first metro operator, manufactured under the 'Make-in-India'
initiative from state-owned Bharat Earth Movers (BEML), in September 2019.

Road Ahead

India is an enticing center for manufacturing foreign investment. Many cell phones and luxury
brands, like car brands, set up their manufacturing centers in the country or seek to develop them.

India's manufacturing sector could cross a billion dollars by 2025, with India projected to be one
of the world's three fastest growing economies and production destinations by 2020. A single
market of 2.5% of the GDP, together with a population of 1.32 trillion people, for India would be
a huge attraction for investors by introducing the Goods-and - Services-Tax (GST).

The government is trying to ensure the sustainable growth of the country by promoting the creation
of industrial corridors and intelligent cities. The corridors will also help integrate, track and build
an atmosphere conducive to industrial growth and will promote advanced manufacturing practices.

3.4 PROFILE OF THE MEDIA SECTOR:

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(Conversion rate taken- Re 1=US$0.01402)

The S&E business is a sunrise economic market that is taking big growth strides. The S&E sector
is the sunrise sector. The Indian M&E industry is at the center of a strong growth phase which is
driven by increasing demand from customers and growing advertisement revenue, demonstrating
its worldwide resilience. Digitalization and greater Internet use during the last decade have been
increasingly driving the industry. The Internet has practically become a network for most people's
entertainment.

After China, India's advertising industry will be the second fastest growing market in Asia.
Currently, about 0.38 per cent of India's gross domestic product accounts for publicity revenues.
Through 2021, India's entertainment and media industries will cross Rs 2.35 billion

Market Dynamics

It is anticipated that the Indian media and entertainment industry will cross about Rs 307,000 core
crore ($43.93 billion) by 2024. Over 2019-24, the media and entertainment market will grow to
13.5% in the CAGR. TV, print and film segments in FY19 with the size of Rs 713 ($10.22 billion)
and Rs 333 ($4.76 billion) and Rs 185 ($2.62 billion) were respectively the main segments for
FY19. The two segments were: This is expected to cross Rs 1025 (US$ 14.67 billion), Rs 375
(US$ 4.76 billion) and Rs 228 (US$ 3.26 billion) respectively, respectively in FY 22. The Indian
TV market is able to cater to 100 million homes as 197 million of the 298 million households had
TV sets as of 2018.

Recent development/Investments

Data released by the Department for the Promotion of Industry and Internal Trade ( DPIIT) in the
period April 2000-December 2019 were US$ 8.71 billion in foreign direct investment ( FDI)
inflows to the information and radio (I&B) sector (including printed media).

• Netflix Inc. expanded by 700 per cent, gaining more customers during2018/19, using local
content and marketing.

• In Tier 2 and Tier 3 regions, about 95% of video consumption is in Indian.

• The Airtel Digital TV and Dish TV arm of Bharti Airtel (DTH) will merg by August 2019.

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 Determinants of Capital Structure Evidence from Indian Stock Market

• Government to launch dedicated platforms for start-ups, as reported in Union Budget

2019-20.

Road Ahead

The Indian entertainment and media industries are on an exciting road to growth. It is estimated
that the industry will expand substantially more rapidly than the global average.

Growth in retail advertisement is anticipated based on factors such as the entry of many food and
beverage companies, increased domestic popularity of e-commerce in the country and domestic
water testing. Rural areas are also a potential profit.

3.5 PROFILE OF THE FOOD PROCESSING AND BEVERAGE SECTOR:

'A sunrise sector' India's food ecosystem offers enormous investment opportunities with boosting
food retail production, favorable economic policies and attractive fiscal incentives. India's sixth
largest food & grocery market is worldwide. The retail market for Food & Grocery in India also
accounts for approximately 65% of India's overall retail sector.

The Indian Government is also undertaking all necessary measures to raise investment in the food
industry, through the Ministry of Food Processing Industries (MoFPI). 39 Mega Food Parks
(MFPs) have been approved by the government to be built in the country under the Mega Food
Park Scheme. 18 Mega Food Parks have been operational at present.

The food processing industry is forecast to increase from $322 billion to CAGR 14.6 million by
2020, to $543 billion by 2020 in 2016.

Projected and recent development/Investments

• The market for Indian food and retail is planned for 828,92 billion dollars by 2020.

• The Indian Dairy market will be twice as high as $140 billion by 2020

• The Food Manufacturing industry may attract 33 billion dollars by 2024 and create jobs
for 9 million people.

• Annual household consumption in India is tripling by 2030, making It the fifth largest
customer

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 Determinants of Capital Structure Evidence from Indian Stock Market

• 26 May 2020 Later Praxis, a Mumbai-based agritech company, acquires Pioneering

Ventures, a Swiss agri-food investment firm; The acquisition will help Pionerring Ventures
to provide the food supply chain with a technologically-enabled solution and improve
operational efficiency.

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 Determinants of Capital Structure Evidence from Indian Stock Market

CHAPTER IV

DATA ANALYSIS AND INTERPRETATION

4.1 MEDIA SECTOR

TABLE NO 4.1.1

TABLE SHOWING DESCRIPTIVE STATISTICS

BR CR DER DPR NT ET RATE

Mean 44.9373 2.413243 0.430243 10.44865 0.107118
Median 15.25229 1.205 0.13 0 0.200753
Maximum 792.9778 139.02 48.93 994.45 25.4
Minimum 0 0 -13.63 -38.31 -31.75
Std. Dev. 81.92405 7.600681 3.370009 53.63275 2.577556
Skewness 4.534367 15.84995 9.893775 16.798 -2.2772
Kurtosis 31.96127 283.6957 137.0919 307.9454 98.59308
Jarque-Bera 14198.7 1230172 283238 1451022 141197.9
Probability 0 0 0 0 0
Sum 16626.8 892.9 159.19 3866 39.6336
Sum Sq. Dev. 2476562 21317.26 4190.718 1061418 2451.559
Observations 370 370 370 370 370

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 Determinants of Capital Structure Evidence from Indian Stock Market

GR ON ASSET NDTS ROTA SIZE TAN

Mean 1.119182 382.3188 0.104585 2.727984 0.305466
Median 1.057902 59.21212 0.08591 2.764707 0.271254
Maximum 5.846491 8708.182 0.563593 4.053416 0.889811
Minimum 0.260588 -4348.3 -0.55739 0.628389 0.001129
Std. Dev. 0.459124 1067.162 0.119422 0.607127 0.231096
Skewness 7.58715 4.019396 0.3186 -0.44425 0.58616
Kurtosis 73.31246 27.00919 6.849984 3.121147 2.416004
Jarque-Bera 79767.39 9883.06 234.7712 12.39679 26.44552
Probability 0 0 0 0.002033 0.000002
Sum 414.0973 141458 38.69635 1009.354 113.0226
Sum Sq. Dev. 77.7831 4.20 5.2625 136.0146 19.7066
Observations 370 370 370 370 370

Analysis:

It is evident from the above table No 4.1 that the mean of Business Risk ratio for the study period
was with a standard deviation of 44.9373 with a standard deviation 81.92405, with a Kurtosis value
of 31.96127 and Skewness of 4.534367. The maximum reported business risk was 792.9778 and the
minimum reported business risk 0.00. The Jarque-Bera value of 14198.7 with a p value of 0.0000.

The mean of Current ratio for the study period was with a standard deviation of 2.413243 with a
standard deviation 7.600681, with a Kurtosis value of 283.6957 and Skewness of 15.84995. The
maximum reported business risk was 139.02 and the minimum reported business risk 0.000. The
Jarque-Bera value of 1230172 with a p value of 0.0000.

The mean of Debt Equity Ratio for the study period was 0.430243 with a standard deviation of
3.370009, kurtosis value of 137.0919 and skewness of 9.893775. The maximum reported debt
equity ratio was 48.93 and minimum reported current ratio was -13.63. The Jarque-Bera value was
283238 with a p value of 0.000

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 Determinants of Capital Structure Evidence from Indian Stock Market

The mean of Dividend Payout Ratio (NT) for the study period was 10.44865 with a standard
deviation of 53.63275, kurtosis value of 307.9454 and skewness of 16.798. The maximum reported
dividend payout ratio was 994.45 and minimum reported dividend payout ratio was-38.31 the
Jarque-Bera value was 1451022 with a p value of 0.000.

The mean of ET Rate for the study period was 0.107 with a standard deviation of 2.577, kurtosis
value of 98.593 and skewness of -2.277. The maximum reported ET rate was 25.4 and minimum
reported ET Rate was -31.75. The Jarque-Bera value was 141197.9 with a p value of 0.000.

The mean Growth Rate on assets for the study period was 1.119 with a standard deviation of 0.459,
kurtosis value of 73.312 and skewness of 7.587. The maximum reported Growth Rate on assets
was 5.8464 and minimum reported Growth Rate on assets was 0.260. The Jarque-Bera value was
79767.39 with a p value of 0.000.

The mean of NDTS for the study period was 382.318 with a standard deviation of 1067.162,
kurtosis value of 27.009 and skewness of 4.019. The maximum reported current NDTS was
8708.182 and minimum reported NDTS was -4348.303. The Jarque-Bera value was 9883.06 with
a p value of 0.000.

The mean of Return on Total Assets (PR_ROTA) for the study period was 0.104 with a standard
deviation of 0.119, kurtosis value of 6.849 and skewness of 0.318. The maximum reported Return
on Total Assets was 0.563 and minimum reported Return on Total Assets was -0.557. The Jarque-
Bera value was 234.771 with a p value of 0.000.

The mean of size for the study period was 2.727 with a standard deviation of 0.607, kurtosis value
of 3.121 and skewness of -0.444. The maximum reported size was 4.053 and minimum reported
Size was 0.628. The Jarque-Bera value was 12.396 with a p value of 0.002.

The mean of Tangibility (TAN) for the study period was 0.305 with a standard deviation of 0.231,
kurtosis value of 2.41 and skewness of 0.586. The maximum reported Tangibility was 0.889and
minimum reported Tangibility was 0.001. The Jarque-Bera value was 26.445 with a p value of
0.000002.

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TABLE NO 4.1.2

INTER-CORRELATION MATRIX TO EXPLORE MULTI-

COLLINEARITY

In statistics, collinearity is an anomaly which is used to explain how one predictor variable
behaves in relation to another predictor variable in a multiple regression model. When two
independent predictors or variables are highly inter-correlated, they both express the same
information and any inference drawn from such data may not be practically reliable. Therefore,
statistically, in any empirical study where we are running a multiple regression, it is advised not
to have any degree of multicollinearity. If they exist, then those predictors are redundant and do
not add any predictive value to the dependent variable. Therefore, in the current study we have
used Pearson correlation coefficient to establish collinearity among independent variables.
Independent variables having correlation coefficient at 0.70 or greater would not be included in
regression analysis.

BR CR DER DPR ETR GR NDTS ROTA SIZE TAN

B 1.000 -0.030 0.113 0.032 0.005 0.071 0.324 0.193 0.502 0.062
RISK
CR - 1.000 -0.018 0.009 0.012 -0.030 0.055 -0.022 -0.029 0.159
0.030
DER 0.113 -0.018 1.000 -0.009 0.000 -0.036 -0.052 -0.071 0.032 0.005

DPR 0.032 0.009 -0.009 1.000 -0.223 -0.005 0.126 0.156 0.087 0.060

ET 0.005 0.012 0.000 -0.223 1.000 0.014 0.030 0.072 0.048 0.013
RATE
GR 0.071 -0.030 -0.036 -0.005 0.014 1.000 0.018 0.025 0.104 0.031

NDTS 0.324 0.055 -0.052 0.126 0.030 0.018 1.000 0.600 0.428 0.065

ROTA 0.193 -0.022 -0.071 0.156 0.072 0.025 0.600 1.000 0.364 0.174

SIZE 0.502 -0.029 0.032 0.087 0.048 0.104 0.428 0.364 1.000 0.241

TAN 0.062 -0.159 0.005 0.060 0.013 -0.031 -0.065 0.174 0.241 1.000

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 Determinants of Capital Structure Evidence from Indian Stock Market

Analysis:

The independent variables having co-linearity above 0.70 would not include in
regression analysis. In the Table No 4.2 the correlation coefficient between BR and CR is -0.030,
followed by DER with 0.113, with DPR it was 0.032, with ETR it was 0.005, with GR it was
0.071, NDTS with 0.324, ROTA it was 0.193, Size it was 0.502 and TAN 0.062.

Between CR and DER -0.018, DPR with 0.009, with ETR it was 0.012, with GR it was -0.030,
with NDTS the correlation coefficient was 0.055, with ROTA the correlation coefficient was -
0.022, with SIZE the correlation coefficient was -0.029and finally with TAN the correlation
coefficient was -0.159.

The correlation coefficient between DER and DPR is -0.009 With ETR it was 0.000, With GR the
correlation coefficient was -0.036, with NDTS it was -0.052 between ROTA it was -0.071, with
SIZE it was 0.032 and at last correlation coefficient with TAN was 0.005.

The correlation coefficient between DPR and ETR was -0.223, with GR it was -0.005, with NDTS
the correlation was 0.126, with ROTA it was 0.156, correlation coefficient with SIZE was 0.087
and with TAN it was 0.060.

The correlation coefficient between ETR and GR was 0.014, with NDTS it was 0.030, with ROTA
correlation was 0.072, with SIZE it was 0.048 and finally with TAN the correlation coefficient
was 0.013.

The correlation coefficient between GR and NDTS was 0.018, with ROTA it was 0.025, with SIZE
it was 0.104 and TAN has correlation coefficient of -0.031.

The correlation coefficient between NDTS and ROTA was 0.600, with SIZE the correlation was
0.428 and with TAN the coefficient of correlation was -0.065.

The correlation coefficient between ROTA and SIZE was 0.364 and with TAN it was 0.174.

The correlation coefficient between SIZE and TAN was 0.241.

This means co-linearity should not constitute a problem in the regression analysis.

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 Determinants of Capital Structure Evidence from Indian Stock Market

TABLE NO 4.1.3

TABLE SHOWING REGRESSION STATISTICS

Variable Coefficient Std. Error t-Statistic Prob.

C 0.58434 0.98474 0.59340 0.55330
BUSSINESS_RISK 0.00581 0.00251 2.31487 0.02120
CR 0.05742 0.02343 2.45102 0.00547
DPR_NT 0.00033 0.00341 0.09520 0.92430
ET_RATE 0.00863 0.07027 0.12281 0.90230
GR_ON_ASSET 0.93699 0.38522 2.43236 0.00382
NDTS -0.00021 0.00023 -0.93805 0.34870
PR__ROTA_ -3.98422 1.92763 -2.06690 0.00053
SIZE 0.89582 0.37244 2.40529 0.00080
TAN -0.07184 0.83000 -0.08655 0.93110
R-squared 0.026296 Mean dependent var 0.430243
Adjusted R-squared 0.001953 S.D. dependent var 3.370009
S.E. of regression 3.366716 Akaike info criterion 5.292408
Sum squared resid 4080.519 Schwarz criterion 5.398178
Log likelihood -969.095 Hannan-Quinn criter. 5.33442
F-statistic 4.080244 Durbin-Watson stat 2.25253
Prob(F-statistic) 0.000369

Analysis:

The Regression results explain 2.62 of the variation in financial leverage is captured by
independent variables with Standard Error of 3.366. This appears indicates the existence of omitted
variables.

F test indicates the fitness of the model. From the above table, suggests that the model is
statistically significant with F value (4.080244) at a significance level of 0.000369

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 Determinants of Capital Structure Evidence from Indian Stock Market

Analysis and Inference

Intercept is α in the set equation. Standard error measures the variability in approximation of the
coefficient and lower standard error means coefficient is closer to the true value of coefficient.
Financial Leverage is dependent variable and BR, CR, DER, DPR, ETR, GR, NDTS, ROTA, SIZE
and TAN

TEST OF HYPOTHESIS

In order to assess the relationship between the independent variable (s) and dependent variable,
the researcher has established the following hypothesis and to prove or disprove the hypothesis the
researcher has employed multiple regression analysis.

Null Hypothesis (H0) There is no significant relationship between independent variables (BR, CR,
DER, DPR, ETR, GR, NDTS, ROTA, SIZE and TAN) and dependent variable (Financial
Leverage).

Alternative Hypothesis (H1) There is significant relationship between independent variables (BR,
CR, DER, DPR, ETR, GR, NDTS, ROTA, SIZE and TAN) and dependent variable (Financial
Leverage).

Results show that P-value is less than 0.05 at 5% level of significance for Business Risk, Effective
Tax Rate, Growth Rate, NDTS, Profitability, Size and Tangibility. However, in case of CR, DPR
it was greater than 0.05 at 5% level of significance.

RESIDUAL DIAGNOSTICS

BREUSCH-GODFREY SERIAL CORRELATION

Berusch-Godfrey Serial Correlation LM Test is used to test autocorrelation errors in the regression
model. This test makes use of residuals considered in the regression analysis and derives a test
statistic. it is used to test the presence of serial correlation that has not been included in the model
structure, if the serial correlation is present it means that incorrect conclusions have been made

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 Determinants of Capital Structure Evidence from Indian Stock Market

from the other tests. As this test is based on Lagrange multiplier testing it can also be referred to
as LM test for serial correlation.

Berusch-Godfrey Serial Correlation LM Test is more accepted than Durbin-Watson statistic which
is valid only for nonstochastic regression model and it is used to test only first order autoregressive
model for errors in regression. Berusch-Godfrey Serial Correlation has a wider scope because it
does not have any of these restrictions and statistically powerful.

TABLE NO. 4.1.4

1. BREUSCH-GODFREY SERIAL CORRELATION LM TEST

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 1.28881 Prob. F(2,358) 0.9874
Obs*R-squared 1.11139 Prob. Chi-Square(2) 0.9754

One of the main assumptions of a regression model is that the error terms are independent of each
other. In order to investigate the serial correlation phenomenon in the constructed model, B-G
Serial correlation LM test has been conducted with the following hypothesis, H0: there is no serial
correlation in the distribution. It is evident from the above table that the p value is more than 5%
which means that the null hypothesis cannot be rejected.

HETEROSKEDASTICITY

Heteroscedasticity means “differently scattered” this is opposite to homoscedasticity, which means

“same scatter.” In regression analysis Homoscedasticity is an important assumption if this
assumption is violated regression analysis is invalid.

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 Determinants of Capital Structure Evidence from Indian Stock Market

Heteroscedasticity is caused when the standard deviation of a variable is not constant over a
specific period of time it arises in two types conditional and unconditional.

Conditional heteroskedasticity is used when future periods of high and low volatility cannot be
identified, unconditional heteroskedasticity is used when futures periods of high and low volatility
can be identified.

Breusch-Pagan-Godfrey Test is a test for Heteroscedasticity of errors in regression this test allows
us to test a range of specifications of heteroskedasticity in the residuals.

TABLE NO. 4.1.5

Heteroskedasticity Test: ARCH

F-statistic 0.137486 Prob. F(1,367) 0.711
Obs*R-squared 0.138183 Prob. Chi-Square(1) 0.7101

In statistics, if the variance of ei is same for all the observations in the distribution it is said to be
Homoskedasticity. However, if the error terms do not have a constant variance or equal variance,
then they are said to be heteroskedastic. In a multiple regression model, it is suggested to have a
Homoskedastic variance terms. Therefore, we have conducted a heteroskedasticity test with the
following Null Hypothesis H0:α = 0 with the alternative as H1:α≠0. It is evident from the above
table that there is no Heteroskedasticity in the time series data as the p value is greater than 5%.

NORMALITY TEST:

Normality test is used to identify whether the data is normally distributed, it is a statistical process
which is used to determine if the data or the sample model fits a standard normal distribution.

Normality test is generally used to test the residuals from a linear regression model; if the residuals
are not normally distributed, they should not be used in tests derived from the normal distribution
such as Z test, T test, F test and chi-squared test. Residuals may not be normally distributed when
the dependent variable may have a wrong functional form or if some important variables are
missing, by correcting some of these systematic errors residuals which are normally distributed
can be obtained.

40 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

CHART NO 4.1.1

240
Series: Residuals
Sample 1 370
200
Observations 370

160 Mean -9.03e-17

Median -0.186235
Maximum 47.78648
120 Minimum -13.79722
Std. Dev. 3.325405
80
Skewness 9.608327
Kurtosis 134.4840

40 Jarque-Bera 272217.1
Probability 0.000000
0
-10 0 10 20 30 40 50

In the current study, we ran Jarque-Bera test to investigate whether the time series data was
normally distributed or not. The set Null hypothesis for this purpose was that the data is normally
distributed. However, the results show that the Jarque-Bera was 272217.1 with a p value of 0.0000,
which is less than the set level of 5% therefore, we can reject the null hypothesis.

CHART NO 4.1.2

STABILITY DIAGNOSTICS
60

40

20

-20

-40

-60
50 100 150 200 250 300 350

CUSUM 5% Significance

41 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

4.2 ENGINEERING SECTOR

TABLE NO 4.2.1

TABLE SHOWING DESCRIPTIVE STATISTICS

BR CR DER DPR NT ET RATE

Mean 135.899 1.821 0.074 22.635 0.132

Median 31.926 1.420 0.290 14.955 0.275

Maximum 3447.520 37.140 130.090 3038.920 23.990

Minimum 0.007 0.000 -507.320 -205.540 -125.889

Std. Dev. 332.816 2.106 18.728 111.263 4.910

Skewness 5.248 10.424 -24.474 24.991 -21.848

Kurtosis 36.313 156.304 678.137 677.000 553.377

Jarque-Bera 40664.380 797895.400 15273510.000 15225805.000 10160810.000

Probability 0.000 0.000 0.000 0.000 0.000

Sum 108718.900 1456.530 59.170 18107.720 105.957

Sum Sq. 88502620.000 3542.750 280237.000 9891255.000 19264.710

Dev.
800.000 800.000 800.000 800.000 800.000
Observations

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 Determinants of Capital Structure Evidence from Indian Stock Market

GR ON ASSET NDTS ROTA SIZE TAN

Mean 12.222 1029.228 1.233 3.033 10.056
Median 1.080 221.924 0.112 2.975 0.233
Maximum 8719.000 32907.760 486.667 5.099 3905.333
Minimum 0.000 -19601.000 -0.707 -1.523 0.000
Std. Dev. 308.268 3781.326 22.298 0.728 194.543
Skewness 28.217 4.919 20.192 -0.470 19.924
Kurtosis 797.466 36.405 412.227 6.868 397.976
Jarque-Bera 21145384.000 40422.580 5636572.000 528.146 5253127.0
Probability 0.000 0.000 0.000 0.000 0.000
Sum 9777.399 823382.300 986.671 2426.330 8044.713
Sum Sq. Dev. 75928324.000 11400000.000 397274.600 422.992 30239723.0
Observations 800.000 800.000 800.000 800.000 800.000

Analysis:

It is evident from the above table No 4.1 that the mean of Business Risk ratio for the
study period was with a standard deviation of 135.899 with a standard deviation 332.816, with a
Kurtosis value of 36.313 and Skewness of 5.248. The maximum reported business risk was 3447.520
and the minimum reported business risk 0.007. The Jarque-Bera value of 40664.380 with a p value
of 0.000.

The mean of Current ratio for the study period was with a standard deviation of 1.821 with a
standard deviation 2.106, with a Kurtosis value of 156.304 and Skewness of 10.424. The maximum
reported business risk was 37.140 and the minimum reported business risk0.000. The Jarque-Bera
value of 797895.400 with a p value of 0.000.

The mean of Debt Equity Ratio for the study period was 0.074 with a standard dev iation of 18.728,
kurtosis value of 678.137 and skewness of -24.474. The maximum reported debt equity ratio was
130.090 and minimum reported current ratio was -507.320. The Jarque-Bera value was
15273510.000 with a p value of 0.000

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 Determinants of Capital Structure Evidence from Indian Stock Market

The mean of Dividend Payout Ratio (NT) for the study period was 22.635 with a standard deviation
of 111.263, kurtosis value of 677.000 and skewness of 24.991. The maximum reported dividend
payout ratio was 3038.920 and minimum reported dividend payout ratio was -205.540 the Jarque-
Bera value was 15225805.000 with a p value of 0.000.

The mean of ET Rate for the study period was 0.132 with a standard deviation of 4.910, kurtosis
value of 553.377 and skewness of -21.848. The maximum reported ET rate was 23.990 and
minimum reported current ratio was -125.889. The Jarque-Bera value was 10160810.000with a p
value of 0.000.

The mean Growth Rate on assets for the study period was 12.222 with a standard deviation of
308.268, kurtosis value of 797.466 and skewness of 28.217. The maximum reported Growth Rate
on assets was 8719.000 and minimum reported Growth Rate on assets was 0.000. The Jarque-Bera
value was 21145384.000 with a p value of 0.000.

The mean of NDTS for the study period was 1029.228 with a standard deviation of 3781.326,
kurtosis value of 36.405 and skewness of 4.919. The maximum reported current NDTS was
32907.760 and minimum reported NDTS was -19601.000. The Jarque-Bera value was 40422.580
with a p value of 0.000.

The mean of Return on Total Assets (PR_ROTA) for the study period was 1.233 with a standard
deviation of 22.298, kurtosis value of 412.227 and skewness of 20.192. The maximum reported
Return on Total Assets was 486.667 and minimum reported Return on Total Assets was -0.707.
The Jarque-Bera value was 5636572.000 with a p value of 0.000.

The mean of size for the study period was 3.033 with a standard deviation of 0.728, kurtosis value
of 6.868 and skewness of -0.470. The maximum reported size was 5.099 and minimum reported
current ratio was -1.523. The Jarque-Bera value was 528.146 with a p value of 0.000.

The mean of Tangibility (TAN) for the study period was 10.056 with a standard deviation of
194.543, kurtosis value of 397.976 and skewness of 19.924. The maximum reported current ratio
was 3905.333 and minimum reported current ratio was 0.000. The Jarque-Bera value was
5253127.000 with a p value of 0.000.

44 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

TABLE NO 4.2.2

INTER-CORRELATION MATRIX TO EXPLORE MULTI-

COLLINEARITY

In statistics, collinearity is an anomaly which is used to explain how one predictor variable behaves
in relation to another predictor variable in a multiple regression model. When two independent
predictors or variables are highly inter-correlated, they both express the same information and any
inference drawn from such data may not be practically reliable. Therefore, statistically, in any
empirical study where we are running a multiple regression, it is advised not to have any degree
of multicollinearity. If they exist, then those predictors are redundant and do not add any predictive
value to the dependent variable. Therefore, in the current study we have used Pearson correlation
coefficient to establish collinearity among independent variables. Independent variables having
correlation coefficient at 0.70 or greater would not be included in regression analysis

BR CR DER DPR ETR GR NDTS ROTA SIZE TAN

B 1.000 -0.066 -0.012 -0.002 0.011 -0.014 0.542 -0.021 0.515 0.020
RISK
CR -0.066 1.000 0.011 0.024 -0.139 -0.014 -0.008 0.784 -0.354 0.782

DER -0.012 0.011 1.000 0.003 0.003 0.001 0.016 0.001 -0.008 0.001

DPR -0.002 0.024 0.003 1.000 -0.002 -0.007 0.005 -0.010 0.005 0.010

ET 0.011 -0.139 0.003 -0.002 1.000 0.003 0.011 -0.210 0.168 0.232
RATE
GR -0.014 -0.014 0.001 -0.007 0.003 1.000 -0.009 -0.002 -0.030 0.002

NDTS 0.542 -0.008 0.016 0.005 0.011 -0.009 1.000 -0.012 0.452 0.014

ROTA -0.021 0.784 0.001 -0.010 -0.210 -0.002 -0.012 1.000 -0.314 0.996

SIZE 0.515 -0.354 -0.008 0.005 0.168 -0.030 0.452 -0.314 1.000 0.315

TAN -0.020 0.782 0.001 -0.010 -0.232 -0.002 -0.014 0.996 -0.315 1.000

45 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

Analysis:

The independent variables having co-linearity above 0.70 would not include in regression analysis.
In the Table No 4.2 the correlation coefficient between BR and CR is -.066, followed by DER
with -.012, with DPR it was -0.002, with ETR it was 0.011, with GR it was -0.014, NDTS with
0.542, ROTA it was -0.021, Size it was 0.515 and TAN –0.020.

Between CR and DER 0.011, DPR with 0.024, with ETR it was -0.139, with GR it was -0.014,
with NDTS the correlation coefficient was -0.008, with ROTA the correlation coefficient was
0.784, with SIZE the correlation coefficient was -0.354 and finally with TAN the correlation
coefficient was 0.78.

The correlation coefficient between DER and DPR is 0.003 With ETR it was 0.003, With GR the
correlation coefficient was 0.001, with NDTS it was 0.016 between ROTA it was 0.001, with SIZE
it was -0.008 and at last correlation coefficient with TAN was 0.001.

The correlation coefficient between DPR and ETR was -0.002, with GR it was -0.007, with NDTS
the correlation was 0.005, with ROTA it was -0.010, correlation coefficient with SIZE was 0.005
and with TAN it was -0.010.

The correlation coefficient between ETR and GR was 0.003, with NDTS it was 0.011, with ROTA
correlation was -0.210, with SIZE it was 0.168 and finally with TAN the correlation coefficient
was -0.232.

The correlation coefficient between GR and NDTS was -0.009, with ROTA it was -0.002, with
SIZE it was -0.030 and TAN has correlation coefficient of -0.002.

The correlation coefficient between NDTS and ROTA was -0.012, with SIZE the correlation was
0.452 and with TAN the coefficient of correlation was -0.014.

The correlation coefficient between ROTA and SIZE was -0.314 and with TAN it was 0.996.

The correlation coefficient between SIZE and TAN was -0.315

This means co-linearity should not constitute a problem in the regression analy

46 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

TABLE NO 4.2.3

TABLE SHOWING REGRESSION STATISTICS

Variable Coefficient Std. Error t-Statistic Prob.

C 0.591719 3.863157 0.1531698 0.8783
BUSINESS_RISK -0.013910 0.002576 -5.3998447 0.0000
CR 0.162406 0.523728 0.3100961 0.7566
DPR_ON_NT 0.000356 0.005994 0.0593927 0.9527
ET_RATE 0.012858 0.144797 0.0888002 0.9293
GR_ON_ASSET 0.000033 0.002162 0.0150324 0.9880
NDTS 0.001700 0.000218 7.7981651 0.0000
PR__ROTA_ -0.000725 0.334668 -0.0021663 0.9983
SIZE 1.261885 0.215345 5.8598296 0.0000
TAN 0.140800 0.038402 3.6664757 0.0253
R-squared 0.001143 Mean dependent var 0.073963
Adjusted R-squared -0.010237 S.D. dependent var 18.72791
S.E. of regression 18.82352 Akaike info criterion 8.720513
Sum squared resid 279916.7 Schwarz criterion 8.77907
Log likelihood -3478.205 Hannan-Quinn criter. 8.743008
F-statistic 7.100422 Durbin-Watson stat 1.926756
Prob(F-statistic) 0.00000

Analysis:

The Regression results explain 0.1143% of the variation in financial leverage is captured by
independent variables with Standard Error of 18.82. This appears indicates the existence of
omitted variables.

F test indicates the fitness of the model. From the above table, suggests that the model is
statistically significant with F value (7.100422) at a significance level of 0.00000

47 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

Analysis and Inference

Intercept is α in the set equation. Standard error measures the variability in approximation of the
coefficient and lower standard error means coefficient is closer to the true value of coefficient.
Financial Leverage is dependent variable and BR, CR, DER, DPR, ETR, GR, NDTS, ROTA, SIZE
and TAN

TEST OF HYPOTHESIS

In order to assess the relationship between the independent variable (s) and dependent variable,
the researcher has established the following hypothesis and to prove or disprove the hypothesis the
researcher has employed multiple regression analysis.

Null Hypothesis (H0) There is no significant relationship between independent variables (BR, CR,
DER, DPR, ETR, GR, NDTS, ROTA, SIZE and TAN) and dependent variable (Financial
Leverage).

Alternative Hypothesis (H1) There is significant relationship between independent variables (BR,
CR, DER, DPR, ETR, GR, NDTS, ROTA, SIZE and TAN) and dependent variable (Financial
Leverage).

Results show that P-value is less than 0.05 at 5% level of significance for Business Risk, Effective
Tax Rate, Growth Rate, NDTS, Profitability, Size and Tangibility. However, in case of CR, DPR
it was greater than 0.05 at 5% level of significance.

RESIDUAL DIAGNOSTICS

BREUSCH-GODFREY SERIAL CORRELATION

Berusch-Godfrey Serial Correlation LM Test is used to test autocorrelation errors in the regression
model. This test makes use of residuals considered in the regression analysis and derives a test
statistic. it is used to test the presence of serial correlation that has not been included in the model
structure, if the serial correlation is present it means that incorrect conclusions have been made

48 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

from the other tests. As this test is based on Lagrange multiplier testing it can also be referred to
as LM test for serial correlation.

Berusch-Godfrey Serial Correlation LM Test is more accepted than Durbin-Watson statistic which
is valid only for nonstochastic regression model and it is used to test only first order autoregressive
model for errors in regression. Berusch-Godfrey Serial Correlation has a wider scope because it
does not have any of these restrictions and statistically powerful.

TABLE NO. 4.2.4

1. BREUSCH-GODFREY SERIAL CORRELATION LM TEST

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 0.573052 Prob. F (2,788) 0.564

Obs*R-squared 1.161868 Prob. Chi-Square (2) 0.5594

One of the main assumptions of a regression model is that the error terms are independent of each
other. In order to investigate the serial correlation phenomenon in the constructed model, B-G
Serial correlation LM test has been conducted with the following hypothesis, H0: there is no serial
correlation in the distribution. It is evident from the above table that the p value is more than 5%
which means that the null hypothesis cannot be rejected.

HETEROSKEDASTICITY

Heteroscedasticity means “differently scattered” this is opposite to homoscedasticity, which means

“same scatter.” In regression analysis Homoscedasticity is an important assumption if this
assumption is violated regression analysis is invalid.

Heteroscedasticity is caused when the standard deviation of a variable is not constant over a
specific period of time it arises in two types conditional and unconditional.

49 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

Conditional heteroskedasticity is used when future periods of high and low volatility cannot be
identified, unconditional heteroskedasticity is used when futures periods of high and low volatility
can be identified.

Breusch-Pagan-Godfrey Test is a test for Heteroscedasticity of errors in regression this test allows
us to test a range of specifications of heteroskedasticity in the residuals.

TABLE NO. 4.2.5

Heteroskedasticity Test: ARCH

F-statistic 0000219 Prob. F (1,797) 0.9882
Obs*R-squared 0.000219 Prob. Chi-Square (1) 0.9882

In statistics, if the variance of ei is same for all the observations in the distribution it is said to be
Homoskedasticity. However, if the error terms do not have a constant variance or equal variance,
then they are said to be heteroskedastic. In a multiple regression model, it is suggested to have a
Homoskedastic variance terms. Therefore, we have conducteda heteroskedasticity test with the
following Null Hypothesis H0:α = 0 with the alternative as H1:α≠0. It is evident from the above
table that there is no Heteroskedasticity in the time series data as the p value is greater than 5%.

NORMALITY TEST

Normality test is used to identify whether the data is normally distributed, it is a statistical process
which is used to determine if the data or the sample model fits a standard normal distribution.

Normality test is generally used to test the residuals from a linear regression model; if the residuals
are not normally distributed, they should not be used in tests derived from the normal distribution
such as Z test, T test, F test and chi-squared test. Residuals may not be normally distributed when
the dependent variable may have a wrong functional form or if some important variables are
missing, by correcting some of these systematic errors residuals which are normally distributed
can be obtained

50 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

CHART NO 4.2.1
600
Series: Residuals
Sample 1 800
500 Observations 800

400 Mean -5.76e-18

Median 0.219394
Maximum 130.4329
300 Minimum -506.3641
Std. Dev. 18.71721
200
Skewness -24.35837
Kurtosis 674.2522

100 Jarque-Bera 15098427

Probability 0.000000
0
-500 -400 -300 -200 -100 0 100

In the current study, we ran Jarque-Bera test to investigate whether the time series data was
normally distributed or not. The set Null hypothesis for this purpose was that the data is normally
distributed. However, the results show that the Jarque-Bera was 150984278 with a p value of
0.0000, which is less than the set level of 5% therefore, we can reject the null hypothesis.

CHART NO 4.2.2

STABILITY DIAGNOSTICS
100

75

50

25

-25

-50

-75

-100
100 200 300 400 500 600 700 800

CUSUM 5% Significance

51 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

4.3 MANUFACTURING SECTOR

TABLE NO 4.3.1

TABLE SHOWING DESCRIPTIVE STATISTICS

BR CR DER DPR NT ET RATE

Mean 54.23518 1.700245 -4.01208 18.63833 0.124834

Median 16.10082 1.22 0.76 9.91 0.19993

Maximum 4021.719 129.92 234.45 1511.97 10.8901

Minimum -117.6343 0.03 -5218.52 -393.72 -40

Std. Dev. 180.9878 4.564439 170.7372 76.67908 1.481046

Skewness 14.4805 24.2082 -30.34882 13.80591 -21.03438

Kurtosis 277.6794 667.3636 927.558 238.2167 581.8845

Jarque-Bera 2987926 17379155 33624255 2196832 13194351

Probability 0 0 0 0 0

Sum 50981.07 1598.23 -3771.355 17520.03 117.3444

Sum Sq. 30758440 19563.22 27372977 5521020 2059.693

Dev.
940 940 940 940 940
Observations

52 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

GR ON ASSET NDTS ROTA SIZE TAN

Mean 1.068341 255.2152 0.110401 2.700384 0.42031
Median 1.038173 99.42424 0.110448 2.671942 0.425918
Maximum 7.262461 19512.79 1.628269 4.514445 0.934041
Minimum 0.187091 -40979.64 -2.768836 1.004321 0.003522
Std. Dev. 0.312845 1753.108 0.153113 0.619328 0.17876
Skewness 9.213279 -12.13312 -6.819497 0.042936 -0.26131
Kurtosis 170.8081 348.5192 150.2068 2.730899 2.587167
Jarque-Bera 1116215 4698919 856021.9 3.125089 17.37291
Probability 0 0 0 0.209602 0.000169
Sum 1004.241 239902.3 103.7773 2538.361 395.0916
Sum Sq. Dev. 91.90163 2.89E+09 22.0135 360.1701 30.00574
Observations 940 940 940 940 940

Analysis:

It is evident from the above table No 4.1 that the mean of Business Risk ratio for the study
period was with a standard deviation of 54.235 with a standard deviation 180.988, with a Kurtosis
value of 277.679 and Skewness of 14.481. The maximum reported business risk was 4021.719 and
the minimum reported business risk -117.634. The Jarque-Bera value of 2987926.000 with a p value
of 0.000.

The mean of Current ratio for the study period was with a standard deviation of 1.700 with a
standard deviation 4.564, with a Kurtosis value of 667.364 and Skewness of 24.208. The maximum
reported business risk was 129.920 and the minimum reported business risk 0.030. The Jarque-Bera
value of 17379155.000 with a p value of 0.000.

The mean of Debt Equity Ratio for the study period was -4.012 with a standard deviation of
170.737, kurtosis value of 927.558 and skewness of -30.349. The maximum reported debt equity
ratio was 234.450 and minimum reported current ratio was -5218.520. The Jarque-Bera value was
33624255.000 with a p value of 0.000

53 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

The mean of Dividend Payout Ratio (NT) for the study period was 18.638 with a standard deviation
of 76.679, kurtosis value of 238.217 and skewness of 13.806. The maximum reported dividend
payout ratio was 1511.970 and minimum reported dividend payout ratio was -393.720 the Jarque-
Bera value was 2196832.000 with a p value of 0.000.

The mean of ET Rate for the study period was 0.125 with a standard deviation of 1.481, kurtosis
value of 581.885 and skewness of -21.034. The maximum reported ET rate was 10.890 and
minimum reported current ratio was -40.000. The Jarque-Bera value was 13194351.000 p value of
0.000.

The mean Growth Rate on assets for the study period was 1.068 with a standard deviation of 0.313,
kurtosis value of 170.808 and skewness of 9.213. The maximum reported Growth Rate on assets
was 7.262 and minimum reported Growth Rate on assets was 0.187. The Jarque-Bera value was
1116215.000 with a p value of 0.000.

The mean of NDTS for the study period was 255.215 with a standard deviation of 1753.108,
kurtosis value of 348.519 and skewness of -12.133. The maximum reported current NDTS was
19512.790 and minimum reported NDTS was -40979.640. The Jarque-Bera value was
4698919.000 with a p value of 0.000.

The mean of Return on Total Assets (PR_ROTA) for the study period was 0.110 with a standard
deviation of 0.153, kurtosis value of 150.207 and skewness of -6.819. The maximum reported
Return on Total Assets was 1.628 and minimum reported Return on Total Assets was -2.769. The
Jarque-Bera value was 856021.900 with a p value of 0.000.

The mean of size for the study period was 2.700 with a standard deviation of 0.619, kurtosis value
of 2.731 and skewness of 0.043. The maximum reported size was 4.514 and minimum reported
current ratio was 1.004. The Jarque-Bera value was 3.125 with a p value of 0.000.

The mean of Tangibility (TAN) for the study period was 0.420 with a standard deviation of 0.179,
kurtosis value of 2.587 and skewness of -0.261. The maximum reported current ratio was 0.934
and minimum reported current ratio was 0.004. The Jarque-Bera value was 17.373 with a p value
of 0.000.

54 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

TABLE NO 4.3.2

INTER-CORRELATION MATRIX TO EXPLORE MULTI-

COLLINEARITY

In statistics, collinearity is an anomaly which is used to explain how one predictor variable behaves
in relation to another predictor variable in a multiple regression model. When two independent
predictors or variables are highly inter-correlated, they both express the same information and any
inference drawn from such data may not be practically reliable. Therefore, statistically, in any
empirical study where we are running a multiple regression, it is advised not to have any degree
of multicollinearity. If they exist, then those predictors are redundant and do not add any predictive
value to the dependent variable. Therefore, in the current study we have used Pearson correlation
coefficient to establish collinearity among independent variables. Independent variables having
correlation coefficient at 0.70 or greater would not be included in regression analysis

BR CR DER DPR ETR GR NDTS ROTA SIZE TAN

B 1.000 -0.010 -0.009 -0.016 0.025 -0.023 -0.037 0.378 0.061 0.010
RISK
CR -0.010 1.000 0.007 0.013 0.038 0.004 0.029 -0.036 -0.217 0.023

DER -0.009 0.007 1.000 0.037 -0.023 0.011 0.012 0.023 -0.046 0.008

DPR -0.016 0.013 0.037 1.000 0.166 0.012 0.041 0.005 -0.027 0.002

ET 0.025 0.038 -0.023 0.166 1.000 0.075 0.118 0.030 -0.126 0.009
RATE
GR -0.023 0.004 0.011 0.012 0.075 1.000 0.271 0.142 -0.002 0.002

NDTS -0.037 0.029 0.012 0.041 0.118 0.271 1.000 0.018 -0.008 0.045

ROTA 0.378 -0.036 0.023 0.005 0.030 0.142 0.018 1.000 0.219 0.032

SIZE 0.061 -0.217 -0.046 -0.027 -0.126 -0.002 -0.008 0.219 1.000 0.028

TAN 0.010 -0.023 0.008 0.002 -0.009 0.002 -0.045 0.032 -0.028 1.000

55 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

Analysis:

The independent variables having co-linearity above 0.70 would not include in regression analysis.
In the Table No 4.2 the correlation coefficient between BR and CR is -0.010, followed by DER
with 0.010, with DPR it was -0.009, with ETR it was -0.016, with GR it was 0.025, NDTS with -
0.023, ROTA it was -0.037, Size it was 0.378 and TAN 0.061.

Between CR and DER -0.023, DPR with 0.007, with ETR it was 0.013, with GR it was 0.038, with
NDTS the correlation coefficient was 0.004, with ROTA the correlation coefficient was 0.029,
with SIZE the correlation coefficient was -0.036 and finally with TAN the correlation coefficient
was -0.217.

The correlation coefficient between DER and DPR is 0.008 With ETR it was 0.002, With GR the
correlation coefficient was -0.009, with NDTS it was 0.002 between ROTA it was -0.045, with
SIZE it was 0.032 and at last correlation coefficient with TAN was -0.028.

The correlation coefficient between DPR and ETR was 0.037, with GR it was -0.023, with NDTS
the correlation was 0.011, with ROTA it was 0.012, correlation coefficient with SIZE was 0.023
and with TAN it was -0.046.

The correlation coefficient between ETR and GR was 0.166, with NDTS it was 0.012, with ROTA
correlation was 0.041, with SIZE it was 0.005 and finally with TAN the correlation coefficient
was -0.027.

The correlation coefficient between GR and NDTS was 0.075, with ROTA it was 0.118, with SIZE
it was 0.030 and TAN has correlation coefficient of -0.126.

The correlation coefficient between NDTS and ROTA was 0.271, with SIZE the correlation was
0.142 and with TAN the coefficient of correlation was -0.002.

The correlation coefficient between ROTA and SIZE was 0.018 and with TAN it was -0.008.

The correlation coefficient between SIZE and TAN was 0.219.

This means co-linearity should not constitute a problem in the regression analysis

56 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

TABLE NO 4.3.3

TABLE SHOWING REGRESSION STATISTICS

Variable Coefficient Std. Error t-Statistic Prob.

C -4.281598 34.58523 -0.123798 0.9015
BUSINESS_RISK -0.00487 0.033478 -0.145462 0.8844
CR -1.108981 1.253591 -0.884644 0.3766
DPR_ON_NT 0.010521 0.073049 0.144032 0.8855
ET_RATE 0.495995 3.827668 0.129582 0.8969
GR_ON_ASSET -5.635302 18.41518 -0.306014 0.7597
NDTS 0.000952 0.003356 0.283532 0.7768
PR__ROTA_ -53.06043 38.13092 -1.391533 0.1644
SIZE 11.71414 10.12251 1.157237 0.2475
TAN -42.43538 33.13401 -1.28072 0.2006
R-squared 0.005557 Mean dependent var -4.01208
Adjusted R-squared -0.004067 S.D. dependent var 170.7372
S.E. of regression 171.0841 Akaike info criterion 13.13277
Sum squared resid 27220878 Schwarz criterion 13.18432
Log likelihood -6162.401 Hannan-Quinn criter. 13.15242
F-statistic 0.577383 Durbin-Watson stat 1.994076
Prob(F-statistic) 0.816405

Analysis:

The Regression results explain 0.55% of the variation in financial leverage is captured by
independent variables with Standard Error of 171.084. This appears indicates the existence of
omitted variables.

F test indicates the fitness of the model. From the above table, suggests that the model is
statistically significant with F value (0.577383) at a significance level of 0.816405.

57 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

Analysis and Inference

Intercept is α in the set equation. Standard error measures the variability in approximation of the
coefficient and lower standard error means coefficient is closer to the true value of coefficient.
Financial Leverage is dependent variable and BR, CR, DER, DPR, ETR, GR, NDTS, ROTA, SIZE
and TAN

TEST OF HYPOTHESIS

In order to assess the relationship between the independent variable (s) and dependent variable,
the researcher has established the following hypothesis and to prove or disprove the hypothesis the
researcher has employed multiple regression analysis.

Null Hypothesis (H0) There is no significant relationship between independent variables (BR, CR,
DER, DPR, ETR, GR, NDTS, ROTA, SIZE and TAN) and dependent variable (Financial
Leverage).

Alternative Hypothesis (H1) There is significant relationship between independent variables (BR,
CR, DER, DPR, ETR, GR, NDTS, ROTA, SIZE and TAN) and dependent variable (Financial
Leverage).

Results show that P-value is less than 0.05 at 5% level of significance for Business Risk, Effective
Tax Rate, Growth Rate, NDTS, Profitability, Size and Tangibility. However, in case of CR, DPR
it was greater than 0.05 at 5% level of significance.

RESIDUAL DIAGNOSTICS

BREUSCH-GODFREY SERIAL CORRELATION

Berusch-Godfrey Serial Correlation LM Test is used to test autocorrelation errors in the regression
model. This test makes use of residuals considered in the regression analysis and derives a test
statistic. it is used to test the presence of serial correlation that has not been included in the model
structure, if the serial correlation is present it means that incorrect conclusions have been made
from the other tests. As this test is based on Lagrange multiplier testing it can also be referred to
as LM test for serial correlation.

58 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

Berusch-Godfrey Serial Correlation LM Test is more accepted than Durbin-Watson statistic which
is valid only for nonstochastic regression model and it is used to test only first order autoregressive
model for errors in regression. Berusch-Godfrey Serial Correlation has a wider scope because it
does not have any of these restrictions and statistically powerful.

TABLE NO. 4.3.4

1. BREUSCH-GODFREY SERIAL CORRELATION LM TEST

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 0.004514 Prob. F (2,928) 0.9955

Obs*R-squared 0.009144 Prob. Chi-Square (2) 0.9954

One of the main assumptions of a regression model is that the error terms are independent of each
other. In order to investigate the serial correlation phenomenon in the constructed model, B-G
Serial correlation LM test has been conducted with the following hypothesis, H0: there is no serial
correlation in the distribution. It is evident from the above table that the p value is more than 5%
which means that the null hypothesis cannot be rejected.

HETEROSKEDASTICITY

Heteroskedasticity means “differently scattered” this is opposite to homoscedasticity, which

means “same scatter.” In regression analysis Homoscedasticity is an important assumption if this
assumption is violated regression analysis is invalid.

Heteroskedasticity is caused when the standard deviation of a variable is not constant over a
specific period of time it arises in two types conditional and unconditional.

Conditional heteroscedasticity is used when future periods of high and low volatility cannot be
identified, unconditional heteroscedasticity is used when futures periods of high and low volatility
can be identified.

59 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

Breusch-Pagan-Godfrey Test is a test for Heteroskedasticity of errors in regression this test allows
us to test a range of specifications of heteroskedasticity in the residuals.

TABLE NO. 4.3.5

Heteroskedasticity Test: ARCH

F-statistic 0.001111 Prob. F (1,937) 0.9734
Obs*R-squared 0.001114 Prob. Chi-Square (1) 0.9734

In statistics, if the variance of ei is same for all the observations in the distribution it is said to be
Homoscedasticity. However, if the error terms do not have a constant variance or equal variance,
then they are said to be heteroskedastic. In a multiple regression model, it is suggested to have a
Homoscedastic variance terms. Therefore, we have conducted heteroscedasticity test with the
following Null Hypothesis H0: α = 0 with the alternative as H1: α≠0. It is evident from the above
table that there is no Heteroscedasticity in the time series data as the p value is greater than 5%.

NORMALITY TEST

Normality test is used to identify whether the data is normally distributed, it is a statistical process
which is used to determine if the data or the sample model fits a standard normal distribution.

Normality test is generally used to test the residuals from a linear regression model; if the residuals
are not normally distributed they should not be used in tests derived from the normal distribution
such as Z test, T test, F test and chi-squared test. Residuals may not be normally distributed when
the dependent variable may have a wrong functional form or if some important variables are
missing, by correcting some of these systematic errors residuals which are normally distributed
can be obtained.

60 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

CHART NO 4.3.1
700
Series: Residuals
600 Sample 1 940
Observations 940
500
Mean 4.33e-15
Median 6.108188
400 Maximum 251.1588
Minimum -5184.973
300 Std. Dev. 170.2622
Skewness -30.08559
200 Kurtosis 916.8849

100 Jarque-Bera 32853243

Probability 0.000000
0
-5000 -4000 -3000 -2000 -1000 0

In the current study, we ran Jarque-Bera test to investigate whether the time series data was
normally distributed or not. The set Null hypothesis for this purpose was that the data is normally
distributed. However, the results show that the Jarque-Bera was 32853243 with a p value of
0.0000, which is less than the set level of 5% therefore, we can reject the null hypothesis.

CHART NO 4.3.2

STABILITY DIAGNOSTICS
100

75

50

25

-25

-50

-75

-100
100 200 300 400 500 600 700 800 900

CUSUM 5% Significance

61 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

4.4 TECHNOLOGY INDUSTRIES:

TABLE NO 4.4.1

TABLE SHOWING DESCRIPTIVE STATISTICS

BR CR DER DPR NT ET RATE

Mean 93.7919 3.868133 0.321607 72.2902 0.219776
Median 13.27947 2.17 0.06 7 0.214373
Maximum 4230.139 177 26.72 31144.69 22
Minimum -55.8473 0 -8.17 -771.57 -20
Std. Dev. 326.033 11.21393 1.413599 1173.446 1.372167
Skewness 7.272068 12.4287 10.71359 24.29244 -0.52579
Kurtosis 68.99419 171.0941 181.1456 622.4377 166.8307
Jarque-Bera 153938.1 973277.9 1085239 13013557 904785.9
Probability 0 0 0 0 0
Sum 75877.65 3129.32 260.18 58482.77 177.7989
Sum Sq.
Dev. 85888370 101607.7 1614.597 1.11E+09 1521.337

Observations 809 809 809 809 809

62 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

GR ON ASSET NDTS ROTA SIZE TAN

Mean 1.088415 2144.622 0.129802 2.645556 1.088415
Median 1.063649 62.18182 0.113871 2.541217 1.063649
Maximum 6.687961 123863.6 1.5662 4.997823 6.687961
Minimum 0.111686 -9015.49 -1.7513 0.609594 0.111686
Std. Dev. 0.346869 10200.61 0.201578 0.762987 0.346869
Skewness 6.266006 7.077723 -0.89442 0.577562 6.266006
Kurtosis 91.58394 61.03886 30.08691 3.514656 91.58394
Jarque-Bera 269807.1 120301.2 24839.7 53.90575 269807.1
Probability 0 0 0 0 0
Sum 880.5279 1734999 105.0095 2140.255 880.5279
Sum Sq. Dev. 97.21699 8.41E+10 32.83198 470.3766 97.21699
Observations 809 809 809 809 809

Analysis:

It is evident from the above table No 4.1 that the mean of Business Risk ratio for the study period
was with a standard deviation of 93.7919 with a standard deviation 326.033, with a Kurtosis value
of 68.99419 and Skewness of 7.272068. The maximum reported business risk was 4230.139 and
the minimum reported business risk 0. The Jarque-Bera value of 153938.1 with a p value of
0.0000.

The mean of Current ratio for the study period was with a standard deviation of 3.868133 with a
standard deviation 11.21393, with a Kurtosis value of 171.0941 and Skewness of 12.4287. The
maximum reported business risk was 177 and the minimum reported business risk 0.000. The
Jarque-Bera value of 973277.9 with a p value of 0.0000.

The mean of Debt Equity Ratio for the study period was 0.321 with a standard deviation of 1.413,
kurtosis value of 181.145 and skewness of 10.713. The maximum reported debt equity ratio was
26.72 and minimum reported Debt Equity Ratio was -8.17. The Jarque-Bera value was 1085239
with a p value of 0.000

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 Determinants of Capital Structure Evidence from Indian Stock Market

The mean of Dividend Payout Ratio (NT) for the study period was 72.290 with a standard deviation
of 1173.446, kurtosis value of 622.437 and skewness of 24.292. The maximum reported dividend
payout ratio was 31144.69 and minimum reported dividend payout ratio was -771.57 the Jarque-
Bera value was 13013557 with a p value of 0.000.

The mean of ET Rate for the study period was 0.2197 with a standard deviation of 1.372, kurtosis
value of 166.830 and skewness of -0.525. The maximum reported ET rate was 22 and minimum
reported ET Rate was -20. The Jarque-Bera value was 904785.9 with a p value of 0.000.

The mean Growth Rate on assets for the study period was 1.0884 with a standard deviation of
0.346, kurtosis value of 91.583 and skewness of 6.266. The maximum reported Growth Rate on
assets was 6.687 and minimum reported Growth Rate on assets was 0.111. The Jarque-Bera value
was 269807.1 with a p value of 0.000.

The mean of NDTS for the study period was 2144.622 with a standard deviation of 10200.61,
kurtosis value of 61.038 and skewness of 7.077. The maximum reported current NDTS was
123863.6 and minimum reported NDTS was -9015.485. The Jarque-Bera value was 120301.2 with
a p value of 0.000.

The mean of Return on Total Assets (PR_ROTA) for the study period was 0.129 with a standard
deviation of 0.201, kurtosis value of 30.086 and skewness of -0.894. The maximum reported
Return on Total Assets was 1.5662 and minimum reported Return on Total Assets was - 1.751302.
The Jarque-Bera value was 5636572 with a p value of 0.000.

The mean of size for the study period was 2.645 with a standard deviation of 0.762, kurtosis value
of 3.514 and skewness of 0.577. The maximum reported size was 4.997and minimum reported
size was 0.609. The Jarque-Bera value was 53.905with a p value of 0.000.

The mean of Tangibility (TAN) for the study period was 1.088 with a standard deviation of 0.346,
kurtosis value of 91.583 and skewness of 6.266. The maximum reported Tangibility was 6.687 and
minimum reported Tangibility was0.111. The Jarque-Bera value was 269807.1 with a p value of
0.0000.

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TABLE NO 4.4.2

INTER-CORRELATION MATRIX TO EXPLORE MULTI-

COLLINEARITY

In statistics, collinearity is an anomaly which is used to explain how one predictor variable behaves
in relation to another predictor variable in a multiple regression model. When two independent
predictors or variables are highly inter-correlated, they both express the same information and any
inference drawn from such data may not be practically reliable. Therefore, statistically, in any
empirical study where we are running a multiple regression, it is advised not to have any degree
of multicollinearity. If they exist, then those predictors are redundant and do not add any predictive
value to the dependent variable. Therefore, in the current study we have used Pearson correlation
coefficient to establish collinearity among independent variables. Independent variables having
correlation coefficient at 0.70 or greater would not be included in regression analysis.

BR CR DER DPR ETR GR NDTS ROTA SIZE TAN

B 1.000 -0.005 -0.017 0.001 -0.001 0.023 0.772 0.153 0.545 0.017
RISK
CR -0.005 1.000 -0.051 0.004 -0.020 -0.040 -0.001 0.001 0.011 0.041

DER 0.001 0.004 0.014 1.000 0.104 0.018 -0.006 -0.008 0.014 0.003

DPR -0.001 -0.020 -0.014 0.104 1.000 0.023 0.002 -0.070 0.027 0.032

ET 0.023 -0.040 -0.014 0.018 0.023 1.000 0.028 0.133 0.010 0.056
RATE
GR 0.772 -0.001 -0.043 -0.006 0.002 0.028 1.000 0.194 0.526 0.037

NDTS 0.153 0.001 -0.064 -0.008 -0.070 0.133 0.194 1.000 0.143 0.345

ROTA 0.545 0.011 0.041 0.014 0.027 0.010 0.526 0.143 1.000 0.167

SIZE -0.017 -0.041 -0.057 -0.003 -0.032 -0.056 -0.037 0.345 -0.167 1.000

TAN -0.017 -0.051 1.000 0.014 -0.014 -0.014 -0.043 -0.064 0.041 0.057

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 Determinants of Capital Structure Evidence from Indian Stock Market

Analysis:

The independent variables having co-linearity above 0.70 would not include in regression
analysis. In the Table No 4.2 the correlation coefficient between BR and CR is -0.005, followed
by DER with -0.017, with DPR it was -0.001, with ETR it was -0.001, with GR it was 0.020,
NDTS with 0.772, ROTA it was 0.153, Size it was 0.545 and TAN –0.020.

Between CR and DER -0.051, DPR with 0.004, with ETR it was -0.020, with GR it was -0.040,
with NDTS the correlation coefficient was -0.001, with ROTA the correlation coefficient was
0.001, with SIZE the correlation coefficient was -0.011 and finally with TAN the correlation
coefficient was -0.041.

The correlation coefficient between DER and DPR is 0.014 With ETR it was -0.014, With GR the
correlation coefficient was -0.014, with NDTS it was -0.043 between ROTA it was -0.064, with
SIZE it was 0.041 and at last correlation coefficient with TAN was -0.057.

The correlation coefficient between DPR and ETR was 0.038, with GR it was -0.015, with NDTS
the correlation was 0.129, with ROTA it was 0.047, correlation coefficient with SIZE was 0.083
and with TAN it was -0.052.

The correlation coefficient between ETR and GR was 0.023, with NDTS it was 0.002, with ROTA
correlation was -0.070, with SIZE it was 0.027 and finally with TAN the correlation coefficient
was -0.032.

The correlation coefficient between GR and NDTS was 0.028, with ROTA it was 0.133, with SIZE
it was 0.010and TAN has correlation coefficient of -0.056.

The correlation coefficient between NDTS and ROTA was 0.194, with SIZE the correlation was
0.526 and with TAN the coefficient of correlation was -0.037.

The correlation coefficient between ROTA and SIZE was 1.000 and 0.143 and with TAN it was
0.345.

The correlation coefficient between SIZE and TAN was -0.167.

This means co-linearity should not constitute a problem in the regression analysis.

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 Determinants of Capital Structure Evidence from Indian Stock Market

TABLE NO 4.4.3

TABLE SHOWING REGRESSION STATISTICS

Variable Coefficient Std. Error t-Statistic Prob.

C 0.07959 0.27339 0.29113 0.77100
BUSINESS_RISK 0.00053 0.00025 2.11245 0.00450
CR -0.00682 0.00444 -1.53799 0.12450
DPR_ON_NT 0.00002 0.00004 0.41176 0.68030
ET_RATE -0.42333 0.03650 -11.59756 0.00000
GR_ON_ASSET 0.38353 0.14559 2.63439 0.00790
NDTS -0.00001 0.00001 -1.53944 0.12440
PR__ROTA_ -0.34594 0.27567 -1.25490 0.20990
SIZE 0.15386 0.03130 4.91540 0.00880
TAN 0.24923 0.07623 3.26969 0.00340
R-squared 0.015386 Mean dependent var 0.321607
Adjusted R-squared 0.004296 S.D. dependent var 1.413599
S.E. of regression 1.41056 Akaike info criterion 3.538134
Sum squared resid 1589.754 Schwarz criterion 3.596179
Log likelihood -1421.18 Hannan-Quinn criter. 3.560421
F-statistic 3.387322 Durbin-Watson stat 1.735062
Prob(F-statistic) 0.000446

Analysis

The Regression results explain 1.5386% of the variation in financial leverage is captured by
independent variables with Standard Error of 1.41 This appears indicates the existence of omitted
variables.

F test indicates the fitness of the model. From the above table, suggests that the model is
statistically significant with F value (3.387322) at a significance level of 0.000446
67 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

Analysis and Inference

Intercept is α in the set equation. Standard error measures the variability in approximation of the
coefficient and lower standard error means coefficient is closer to the true value of coefficient.
Financial Leverage is dependent variable and BR, CR, DER, DPR, ETR, GR, NDTS, ROTA, SIZE
and TAN

TEST OF HYPOTHESIS

In order to assess the relationship between the independent variable (s) and dependent variable,
the researcher has established the following hypothesis and to prove or disprove the hypothesis the
researcher has employed multiple regression analysis.

Null Hypothesis (H0) There is no significant relationship between independent variables (BR, CR,
DER, DPR, ETR, GR, NDTS, ROTA, SIZE and TAN) and dependent variable (Financial
Leverage).

Alternative Hypothesis (H1) There is significant relationship between independent variables (BR,
CR, DER, DPR, ETR, GR, NDTS, ROTA, SIZE and TAN) and dependent variable (Financial
Leverage).

Results show that P-value is less than 0.05 at 5% level of significance for Business Risk, Effective
Tax Rate, Growth Rate, NDTS, Profitability, Size and Tangibility. However, in case of CR, DPR
it was greater than 0.05 at 5% level of significance.

RESIDUAL DIAGNOSTICS

BREUSCH-GODFREY SERIAL CORRELATION

Berusch-Godfrey Serial Correlation LM Test is used to test autocorrelation errors in the regression
model. This test makes use of residuals considered in the regression analysis and derives a test
statistic. it is used to test the presence of serial correlation that has not been included in the model
structure, if the serial correlation is present it means that incorrect conclusions have been made

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 Determinants of Capital Structure Evidence from Indian Stock Market

from the other tests. As this test is based on Lagrange multiplier testing it can also be referred to
as LM test for serial correlation.

Berusch-Godfrey Serial Correlation LM Test is more accepted than Durbin-Watson statistic which
is valid only for nonstochastic regression model and it is used to test only first order autoregressive
model for errors in regression. Berusch-Godfrey Serial Correlation has a wider scope because it
does not have any of these restrictions and statistically powerful.

TABLE NO. 4.4.4

1. BREUSCH-GODFREY SERIAL CORRELATION LM TEST

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 2.53325 Prob. F (2,797) 0.9541
Obs*R-squared 1.9014 Prob.Chi-Square(2) 0.8561

One of the main assumptions of a regression model is that the error terms are independent of each
other. In order to investigate the serial correlation phenomenon in the constructed model, B-G
Serial correlation LM test has been conducted with the following hypothesis, H0: there is no serial
correlation in the distribution. It is evident from the above table that the p value is more than 5%
which means that the null hypothesis cannot be rejected.

HETEROSKEDASTICITY

Heteroscedasticity means “differently scattered” this is opposite to homoscedasticity, which means

“same scatter.” In regression analysis Homoscedasticity is an important assumption if this
assumption is violated regression analysis is invalid.

Heteroscedasticity is caused when the standard deviation of a variable is not constant over a
specific period of time it arises in two types conditional and unconditional.

Conditional heteroskedasticity is used when future periods of high and low volatility cannot be
identified, unconditional heteroskedasticity is used when futures periods of high and low volatility
can be identified.

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 Determinants of Capital Structure Evidence from Indian Stock Market

Breusch-Pagan-Godfrey Test is a test for Heteroscedasticity of errors in regression this test allows
us to test a range of specifications of heteroskedasticity in the residuals.

TABLE NO. 4.4.5

Heteroskedasticity Test: ARCH

F-statistic 1.351742 Prob. F(1,805) 0.4373
Obs*R-squared 1.339097 Prob. Chi-Square (1) 0.4372

In statistics, if the variance of ei is same for all the observations in the distribution it is said to be
Homoskedasticity. However, if the error terms do not have a constant variance or equal variance,
then they are said to be heteroskedastic. In a multiple regression model, it is suggested to have a
Homoskedastic variance terms. Therefore, we have conducted a heteroskedasticity test with the
following Null Hypothesis H0:α = 0 with the alternative as H1:α≠0. It is evident from the above
table that there is no Heteroskedasticity in the time series data as the p value is greater than 5%.

NORMALITY TEST

Normality test is used to identify whether the data is normally distributed, it is a statistical process
which is used to determine if the data or the sample model fits a standard normal distribution.

Normality test is generally used to test the residuals from a linear regression model; if the residuals
are not normally distributed, they should not be used in tests derived from the normal distribution
such as Z test, T test, F test and chi-squared test. Residuals may not be normally distributed when
the dependent variable may have a wrong functional form or if some important variables are
missing, by correcting some of these systematic errors residuals which are normally distributed
can be obtained.

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 Determinants of Capital Structure Evidence from Indian Stock Market

CHART NO 4.4.1
700
Series: Residuals
600 Sample 1 810
Observations 809
500
Mean -8.58e-17
Median -0.210377
400 Maximum 26.42914
Minimum -8.613675
300 Std. Dev. 1.402682
Skewness 10.85171
200 Kurtosis 186.5581

100 Jarque-Bera 1151632.

Probability 0.000000
0
-5 0 5 10 15 20 25

In the current study, we ran Jarque-Bera test to investigate whether the time series data was
normally distributed or not. The set Null hypothesis for this purpose was that the data is normally
distributed. However, the results show that the Jarque-Bera was 1151632 with a p value of 0.0000,
which is less than the set level of 5% therefore, we can reject the null hypothesis.

CHART NO 4.4.2

STABILITY DIAGNOSTICS
100

75

50

25

-25

-50

-75

-100
100 200 300 400 500 600 700 800

CUSUM 5% Significance

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 Determinants of Capital Structure Evidence from Indian Stock Market

4.5 FOOD AND BEVERAGE

TABLE NO 4.5.1

TABLE SHOWING DESCRIPTIVE STATISTICS

BR CR DPR NT ET RATE GR ASSET

Mean 113.2488 1.542667 -3.78846 15.75453 0.169466
Median 30.69551 1.07 0.625 6.34 0.200908
Maximum 2091.784 35.53 140.69 1038.97 1.953908
Minimum 0.007071 0 -2670.76 -217.7 -2.85714
Std. Dev. 237.0887 2.727076 122.4085 54.88493 0.258712
Skewness 4.725927 8.756892 -21.6091 13.73658 -2.34083
Kurtosis 31.30241 94.47685 471.4148 254.7662 49.54023
Jarque-Bera 17807.28 173494.9 4425605 1282820 43758.21
Probability 0 0 0 0 0
Sum 54359.41 740.48 -1818.46 7562.175 81.34373
Sum Sq. Dev. 26925093 3562.296 7177257 1442918 32.06029
Observations 480 480 480 480 480

72 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

NDTS ROTA SIZE ASSET TAN DER

Mean 354.481 0.097944 2.955298 1.11197 -3.78846
Median 181.697 0.105885 2.968918 0.276833 0.625
Maximum 5205 0.65276 4.170346 10.773 140.69
Minimum -
13379.33 -5.83654 0.956649 0.1194 -2670.76
Std. Dev. 1148.464 0.288208 0.565999 0.568125 122.4085
Skewness -
5.162216 -18.2419 -0.48182 12.30275 -21.6091
Kurtosis 63.36619 376.2422 3.687675 195.053 471.4148
Jarque- 75013.41
Bera 2812816 28.03009 749795.8 4425605
Probability 0 0 0.000001 0.46524 0
Sum 170150.9 47.01326 1418.543 12.68504 -1818.46
Sum Sq. 6.32E+08
Dev. 39.78748 153.45 1.240051 7177257
Observation 480 480 480 480 480

Analysis:

: It is evident from the above table No 4.1 that the mean of Business Risk ratio for the study period
was with a standard deviation of 113.2488 with a standard deviation 237.0887, with a Kurtosis
value of 31.30241 and Skewness of 4.725927. The maximum reported business risk was 2091.784
and the minimum reported business risk 0.007071. The Jarque-Bera value of 17807.28 with a p
value of 0.0000.

The mean of Current ratio for the study period was with a standard deviation of 1.542667 with a
standard deviation 2.727076, with a Kurtosis value of 94.47685 and Skewness of 8.756892. The
maximum reported business risk was 35.53 and the minimum reported business risk 0.000. The
Jarque-Bera value of 797895.400 with a p value of 0.0000.

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 Determinants of Capital Structure Evidence from Indian Stock Market

The mean of Debt Equity Ratio for the study period was-3.788 with a standard deviation of
122.408, kurtosis value of 471.414 and skewness of -21.609 . The maximum reported debt equity
ratio was 140.69 and minimum reported Debt Equity Ratio was -2670.76. The Jarque-Bera value
was 4425605 with a p value of 0.000

The mean of Dividend Payout Ratio (NT) for the study period was 15.754 with a standard deviation
of 54.884, kurtosis value of 254.766 and skewness of 13.736. The maximum reported dividend
payout ratio was 1038.97 and minimum reported dividend payout ratio was -217.7 the Jarque-Bera
value was 1282820 with a p value of 0.000

The mean of ET Rate for the study period was 0.169 with a standard deviation of 0.258, kurtosis
value of 49.540 and skewness of -2.340. The maximum reported ET rate was 1.953 and minimum
reported ET Rate was -2. 857.The Jarque-Bera value was 43758.21 with a p value of 0.000.

The mean Growth Rate on assets for the study period was 1.111 with a standard deviation of 0.568,
kurtosis value of 195.053 and skewness of 12.302. The maximum reported Growth Rate on assets
was 10.773 and minimum reported Growth Rate on assets was 0.119. The Jarque-Bera value was
749795.8 with a p value of 0.000.

The mean of NDTS for the study period was 354.481 with a standard deviation of 1148.464,
kurtosis value of 63.366 and skewness of -5.162. The maximum reported current NDTS was 5205
and minimum reported NDTS was -13379.33. The Jarque-Bera value was 75013.41 with a p value
of 0.000.

The mean of Return on Total Assets (PR_ROTA) for the study period was 0.097 with a standard
deviation of 0.288, kurtosis value of 376.242 and skewness of -18.241. The maximum reported
Return on Total Assets was 0.652 and minimum reported Return on Total Assets was -5.836. The
Jarque-Bera value was 2812816 with a p value of 0.000.

The mean of size for the study period was 2.955 with a standard deviation of 0.565, kurtosis value
of 3.687 and skewness of -0.481. The maximum reported size was 4.170 and minimum reported
current ratio was 0.956. The Jarque-Bera value was 28.030 with a p value of 0.00.

The mean of Tangibility (TAN) for the study period was 1.11197 with a standard deviation of
0.568125, kurtosis value of 195.053 and skewness of 12.30275. The maximum reported Tangibility

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 Determinants of Capital Structure Evidence from Indian Stock Market

was 10.773 and minimum reported Tangibility was 0.1194. The Jarque-Bera value was 749795.8
with a p value of 0.000.

TABLE NO 4.5.2

INTER-CORRELATION MATRIX TO EXPLORE MULTI-

COLLINEARITY

In statistics, collinearity is an anomaly which is used to explain how one predictor variable behaves
in relation to another predictor variable in a multiple regression model. When two independent
predictors or variables are highly inter-correlated, they both express the same information and any
inference drawn from such data may not be practically reliable. Therefore, statistically, in any
empirical study where we are running a multiple regression, it is advised not to have any degree
of multicollinearity. If they exist, then those predictors are redundant and do not add any predictive
value to the dependent variable. Therefore, in the current study we have used Pearson correlation
coefficient to establish collinearity among independent variables. Independent variables having
correlation coefficient at 0.70 or greater would not be included in regression analysis.

BR CR DER DPR ETR GR NDTS ROTA SIZE TAN

B 1.000 -0.016 -0.035 -0.066 0.036 -0.057 -0.069 0.489 0.034 0.010
RISK
CR -0.016 1.000 -0.007 0.153 0.037 0.031 0.020 0.005 -0.005 0.011

DER -0.035 -0.007 1.000 -0.031 -0.026 0.004 0.043 -0.108 -0.237 0.012

DPR -0.066 0.153 -0.031 1.000 0.027 0.161 0.102 0.014 -0.062 0.025

ET 0.036 0.037 -0.026 0.027 1.000 0.119 0.103 0.053 -0.118 0.022
RATE
GR -0.057 0.031 0.004 0.161 0.119 1.000 0.491 0.256 -0.118 0.025

NDTS -0.069 0.020 0.043 0.102 0.103 0.491 1.000 -0.024 -0.054 0.025

ROTA 0.489 0.005 -0.108 0.014 0.053 0.256 -0.024 1.000 -0.172 0.013

SIZE 0.034 -0.005 -0.237 -0.062 -0.118 -0.118 -0.054 -0.172 1.000 0.039

TAN 0.010 0.011 0.012 0.025 0.022 0.025 0.025 -0.013 0.039 1.000

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 Determinants of Capital Structure Evidence from Indian Stock Market

Analysis:

The independent variables having co-linearity above 0.70 would not include in regression
analysis. In the Table No 4.2 the correlation coefficient between BR and CR is -0.035, followed
by DER with 0.010, with DPR it was -0.010, with ETR it was -0.066, with GR it was 0.036, NDTS
with -0.057, ROTA it was -0.069, Size it was 0.489 and TAN 0.034.

Between CR and DER 0.012, DPR with 0-0.007, with ETR it was -0.031, with GR it was -0.026,
with NDTS the correlation coefficient was 0.004, with ROTA the correlation coefficient was
0.043, with SIZE the correlation coefficient was -0.108 and finally with TAN the correlation
coefficient was -0.237.

The correlation coefficient between DPR and ETR was 0.153, with GR it was 0.037, with NDTS
the correlation was 0.031, with ROTA it was 0.020, correlation coefficient with SIZE was 0.005
and with TAN it was -0.005.

The correlation coefficient between ETR and GR was 0.027, with NDTS it was0.161, with ROTA
correlation was 0.102, with SIZE it was 0.014 and finally with TAN the correlation coefficient
was -0.062.

The correlation coefficient between GR and NDTS was 0.119, with ROTA it was 0.103, with SIZE
it was 0.053 and TAN has correlation coefficient of -0.118.

The correlation coefficient between NDTS and ROTA was 0.491, with SIZE the correlation was
0.256 and with TAN the coefficient of correlation was -0.118.

The correlation coefficient between ROTA and SIZE was -0.024 and with TAN it was-0.054.

The correlation coefficient between SIZE and TAN was -0.172.

This means co-linearity should not constitute a problem in the regression analysis.

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TABLE NO 4.5.3

TABLE SHOWING REGRESSION STATISTICS

Variable Coefficient Std. Error t-Statistic Prob.

C -10.5124 42.16713 -0.249303189 0.8032
B_RISK_OCF_ 0.612163 0.028269 21.65492235 0.0000
CR 1.001075 2.162601 0.462903236 0.6436
DPR_NT_ 0.54143 0.10393 5.20956413 0.0012
ET_RATE 11.02229 22.40267 0.492007872 0.6229
GR_ASSET_ 5.105275 1.09013 4.683179988 0.0387
NDTS 0.002776 0.006112 0.454188482 0.6499
PROFITABILITY 4.067288 0.88244 4.609138298 0.0046
SIZE_ASSET_ -4.85174 12.6569 -0.38332761 0.7017
TANGIBILITY 22.78323 2.85832 7.970846511 0.0000
R-squared 0.004688 Mean dependent var -3.78846
Adjusted R-squared -0.01437 S.D. dependent var 122.4085
S.E. of regression 123.2849 Akaike info criterion 12.48749
Sum squared resid 7143614 Schwarz criterion 12.57444
Log likelihood -2987 Hannan-Quinn criter. 12.52167
F-statistic 4.245945 Durbin-Watson stat 2.00288
Prob(F-statistic) 0.000000

Analysis

The Regression results explain 0.4688% of the variation in financial leverage is captured by
independent variables with Standard Error of 123.2849. This appears indicates the existence of
omitted variables.

F test indicates the fitness of the model. From the above table, suggests that the model is
statistically significant with F value (4.245945) at a significance level of 0.00000

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 Determinants of Capital Structure Evidence from Indian Stock Market

Analysis and Inference

Intercept is α in the set equation. Standard error measures the variability in approximation of the
coefficient and lower standard error means coefficient is closer to the true value of coefficient.
Financial Leverage is dependent variable and BR, CR, DER, DPR, ETR, GR, NDTS, ROTA, SIZE
and TAN

TEST OF HYPOTHESIS

In order to assess the relationship between the independent variable (s) and dependent variable,
the researcher has established the following hypothesis and to prove or disprove the hypothesis the
researcher has employed multiple regression analysis.

Null Hypothesis (H0) There is no significant relationship between independent variables (BR,
CR, DER, DPR, ETR, GR, NDTS, ROTA, SIZE and TAN) and dependent variable (Financial
Leverage).

Alternative Hypothesis (H1) There is significant relationship between independent variables (BR,
CR, DER, DPR, ETR, GR, NDTS, ROTA, SIZE and TAN) and dependent variable (Financial
Leverage).

Results show that P-value is less than 0.05 at 5% level of significance for Business Risk, Effective
Tax Rate, Growth Rate, NDTS, Profitability, Size and Tangibility. However, in case of CR, DPR
it was greater than 0.05 at 5% level of significance.

RESIDUAL DIAGNOSTICS

BREUSCH-GODFREY SERIAL CORRELATION

Berusch-Godfrey Serial Correlation LM Test is used to test autocorrelation errors in the regression
model. This test makes use of residuals considered in the regression analysis and derives a test
statistic. it is used to test the presence of serial correlation that has not been included in the model
structure, if the serial correlation is present it means that incorrect conclusions have been made
from the other tests. As this test is based on Lagrange multiplier testing it can also be referred to
as LM test for serial correlation.

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 Determinants of Capital Structure Evidence from Indian Stock Market

Berusch-Godfrey Serial Correlation LM Test is more accepted than Durbin-Watson statistic which
is valid only for nonstochastic regression model and it is used to test only first order autoregressive
model for errors in regression. Berusch-Godfrey Serial Correlation has a wider scope because it
does not have any of these restrictions and statistically powerful.

TABLE NO. 4.4.4

1. BREUSCH-GODFREY SERIAL CORRELATION LM TEST

Breusch-Godfrey Serial Correlation LM Test:

F-statistic 0.017795 Prob. F(2,468) 0.9824
Obs*R-squared 0.036493 Prob.Chi-Square(2) 09819

One of the main assumptions of a regression model is that the error terms are independent of each
other. In order to investigate the serial correlation phenomenon in the constructed model, B-G
Serial correlation LM test has been conducted with the following hypothesis, H0: there is no serial
correlation in the distribution. It is evident from the above table that the p value is more than 5%
which means that the null hypothesis cannot be rejected.

HETEROSKEDASTICITY

Heteroscedasticity means “differently scattered” this is opposite to homoscedasticity, which means

“same scatter.” In regression analysis Homoscedasticity is an important assumption if this
assumption is violated regression analysis is invalid.

Heteroscedasticity is caused when the standard deviation of a variable is not constant over a
specific period of time it arises in two types conditional and unconditional.

Conditional heteroskedasticity is used when future periods of high and low volatility cannot be
identified, unconditional heteroskedasticity is used when futures periods of high and low volatility
can be identified.

Breusch-Pagan-Godfrey Test is a test for Heteroscedasticity of errors in regression this test allows
us to test a range of specifications of heteroskedasticity in the residuals.

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 Determinants of Capital Structure Evidence from Indian Stock Market

TABLE NO 4.5.5

Heteroskedasticity Test: ARCH

F-statistic 0.002097 Prob. F(1,477) 0.9635
Obs*R-squared 0.0002106 Prob. Chi-Square(1) 0.9634

In statistics, if the variance of ei is same for all the observations in the distribution it is said to be
Homoskedasticity. However, if the error terms do not have a constant variance or equal variance,
then they are said to be heteroskedastic. In a multiple regression model, it is suggested to have a
Homoskedastic variance terms. Therefore, we have conducted a heteroskedasticity test with the
following Null Hypothesis H0:α = 0 with the alternative as H1:α≠0. It is evident from the above
table that there is no Heteroskedasticity in the time series data as the p value is greater than 5%.

NORMALITY TEST

Normality test is used to identify whether the data is normally distributed, it is a statistical process
which is used to determine if the data or the sample model fits a standard normal distribution.

Normality test is generally used to test the residuals from a linear regression model; if the residuals
are not normally distributed they should not be used in tests derived from the normal distribution
such as Z test,T test, F test and chi-squared test. Residuals may not be normally distributed when
the dependent variable may have a wrong functional form or if some important variables are
missing, by correcting some of these systematic errors residuals which are normally distributed
can be obtained.

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 Determinants of Capital Structure Evidence from Indian Stock Market

CHART NO 4.5.1
400
Series: Residuals
350 Sample 1 480
Observations 480
300
Mean -3.91e-15
250 Median 4.986196
Maximum 138.9892
200 Minimum -2654.067
Std. Dev. 122.1212
150 Skewness -21.44781
Kurtosis 466.7222
100
Jarque-Bera 4337566.
50
Probability 0.000000
0
-2400 -2000 -1600 -1200 -800 -400 0

In the current study, we ran Jarque-Bera test to investigate whether the time series data was
normally distributed or not. The set Null hypothesis for this purpose was that the data is normally
distributed. However, the results show that the Jarque-Bera was 4337566 with a p value of 0.0000,
which is less than the set level of 5% therefore, we can reject the null hypothesis.

CHART NO 4.5.2

STABILITY DIAGNOSTICS
80

60

40

20

-20

-40

-60

-80
50 100 150 200 250 300 350 400 450

CUSUM 5% Significance

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 Determinants of Capital Structure Evidence from Indian Stock Market

CHAPTER 5

5.1 SUMMARY OF FINDINGS

5.1.1 MEDIA SECTOR:

5.1.1.1 Descriptive statistics: the mean of Business Risk ratio for the study period was with a
standard deviation of 44.9373 with a standard deviation 81.92405. The mean of Current ratio for
the study period was with a standard deviation of 2.413243. The mean of Debt Equity Ratio for
the study period was 0.430243 with a standard deviation of 3.370009. The mean of Dividend
Payout Ratio (DPR) for the study period was 10.44865 with a standard deviation of 53.63275. The
mean of ET Rate for the study period was 0.107 with a standard deviation of 2.577. The mean
Growth Rate on assets for the study period was 1.119 with a standard deviation of 0.459. The mean
of NDTS for the study period was 382.318 with a standard deviation of 1067.162. The mean of
Return on Total Assets (PR_ROTA) for the study period was 0.104 with a standard deviation of
0.119. The mean of size for the study period was 2.727 with a standard deviation of 0. 607.The
mean of Tangibility (TAN) for the study period was 0.305 with a standard deviation of 0.231.

5.1.1.2 Inter-correlation matrix: the current study revealed that the coefficient of correlation of
the independent variables did not have correlation coefficient >0.60. this indicates that the
collinearity issue was not there to run the regression model.

Regression results:

R2 for Media sector was 2.62% meaning that of the variation in debt equity ratio is captured by
independent variables. F test was statistically significant. The major determinants of debt equity
Ratio in media sector Business Risk (BR), Current Ratio (CR), Growth Rate (GR), Profitability
(PR) and Size (SZ). However, Dividend Pay-Out Ratio (DPR), Effective Tax Rate (ETR), Non-
Debt Tax Shield (NDTS) and Tangibility (TG) were not statistically significant.

Independent variables such as Non-Debt Tax Shield (NDTS), Profitability (PR) and Tangibility
(PR) have negative coefficient meaning that they share inverse relationship with the Debt Equity

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 Determinants of Capital Structure Evidence from Indian Stock Market

Ratio (DER). However, independent variables such as Business Risk (BR), Current Ratio (CR),
Dividend Pay-Out Ratio DPR), Effective Tax Rate (ETR), Growth Rate(GR) and Size (SZ) have
positive coefficients meaning that they share direct relationship with Debt Equity Ratio (DER).

Residuals diagnostics: (i) there is no serial correlation in the data set; (ii) data is homoscedastic
and (iii) data is not normally distributed.

5.1.2 ENGINEERING SECTOR:

5.1.2.1 Descriptive statistics: the mean of Business Risk ratio for the study period was with a
standard deviation 332.816. The mean of Current ratio for the study period was 1.821 with a
standard deviation 2.106. The mean of Debt Equity Ratio for the study period was 0.074 with a
standard deviation of 18.728. The mean of Dividend Pay-out Ratio (NT) for the study period was
22.635 with a standard deviation of 111.263. The mean of ET Rate for the study period was 0.132
with a standard deviation of 4.910. The mean Growth Rate on assets for the study period was
12.222 with a standard deviation of 308.268. The mean of NDTS for the study period was 1029.228
with a standard deviation of 3781.326. The mean of Return on Total Assets (PR_ROTA) for the
study period was 1.233 with a standard deviation of 22.298. The mean of size for the study period
was 3.033 with a standard deviation of 0.728. The mean of Tangibility (TAN) for the study period
was 10.056 with a standard deviation of 194.543.

5.1.2.2 Inter-correlation matrix: the current study revealed that the coefficient of correlation
between CR and profitability >0.60, CR and tangibility was >0.60, profitability and tangibility was
>0.60. Rest of the independent variables did not have correlation coefficient >0.60. this indicates
that the collinearity issue was not there to run the regression model.

Regression results:

R^2 for Engineering sector was 0.11% meaning that of the variation in debt equity ratio is captured
by independent variables. F test was statistically significant. The major determinants of debt equity
Ratio in engineering sector Business Risk (BR), Non-Debt Tax Shield (NDTS), Size (SZ), and
Tangibility (TAN). However, Current Ratio (CR), Dividend Pay-Out Ratio DPR), Effective Tax
Rate (ETR), Growth Rate GR), and Profitability (PR) were not statistically significant.

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Independent variables such as Business Risk (BR) and Profitability (PR) have negative coefficient
meaning that they share inverse relationship with the Debt Equity Ratio (DER). However,
independent variables such as Current Ratio (CR), Dividend Pay-Out Ratio (DPR), Effective Tax
Rate(ETR), Growth Rate (GR), Non-Debt Tax Shield (NDTS), Size (SZ) and Tangibility (TAN)
have positive coefficients meaning that they share direct relationship with Debt Equity Ratio
(DER).

Residuals diagnostics: (i) there is no serial correlation in the data set; (ii) data is homoscedastic
and (iii) data is not normally distributed.

5.1.3 MANUFACTURING SECTOR:

5.1.3.1 Descriptive statistics: The mean of Business Risk ratio for the study period was with a
standard deviation of 54.235 with a standard deviation 180.988. The mean of Current ratio for the
study period was with a standard deviation of 1.700 with a standard deviation 4.564. The mean of
Debt Equity Ratio for the study period was -4.012 with a standard deviation of 170.737. The mean
of Dividend Payout Ratio (NT) for the study period was 18.638 with a standard deviation of
76.679. The mean of ET Rate for the study period was 0.125 with a standard deviation of 1.481.
The mean Growth Rate on assets for the study period was 1.068 with a standard deviation of 0.313.
The mean of NDTS for the study period was 255.215 with a standard deviation of 1753.108. The
mean of Return on Total Assets (PR_ROTA) for the study period was 0.110 with a standard
deviation of 0.153. The mean of size for the study period was 2.700 with a standard deviation of
0.619. The mean of Tangibility (TAN) for the study period was 0.420 with a standard deviation of
0.179.

5.1.1.2 Inter-correlation matrix: the current study revealed that the coefficient of correlation of
the independent variables did not have correlation coefficient >0.60. this indicates that the
collinearity issue was not there to run the regression model.

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 Determinants of Capital Structure Evidence from Indian Stock Market

Regression results:

R2 for Media sector was 0.55% meaning that of the variation in Debt Equity Ratio (DER) is
captured by independent variables. F test was statistically significant. The major determinants of
debt equity Ratio (DER) in Manufacturing Sector Business Risk (BR), Current Ratio (CR), Growth
Rate (GR), Profitability (PR) and Size (SZ). However, Dividend Pay-Out Ratio (DPR), Effective
Tax Rate (ETR), Non-Debt Tax Shield (NDTS) and Tangibility (TAN) were not statistically
significant.

Independent variables such as Non-Debt Tax Shield (NDTS), Profitability (PR) and Tangibility
(TAN) have negative coefficient meaning that they share inverse relationship with the Debt Equity
Ratio (DER). However, independent variables such as Business Risk (BR), Current Ratio (CR),
Dividend Pay-Out Ratio (DPR), Effective Tax Rate (ETR), Growth rate(GR) and Size (SZ) have
positive coefficients meaning that they share direct relationship with Debt Equity Ratio (DER).

Residuals diagnostics: (i) there is no serial correlation in the data set; (ii) data is homoscedastic
and (iii) data is not normally distributed.

5.1.4 TECHNOLOGY INDUSTRIES SECTOR:

5.1.4.1 Descriptive statistics: the mean of Business Risk ratio for the study period was with a
standard deviation 326.033, The mean of Current ratio for the study period was with a standard
deviation 11.21393. The mean of Debt Equity Ratio for the study period was 0.321 with a standard
deviation of 1.413. The mean of Dividend Pay-out Ratio (NT) for the study period was 72.290
with a standard deviation of 1173.446. The mean of ET Rate for the study period was 0.2197 with
a standard deviation of 1.372. The mean Growth Rate on assets for the study period was 1.0884
with a standard deviation of 0.346. The mean of NDTS for the study period was 2144.622 with a
standard deviation of 10200.61. The mean of Return on Total Assets (PR_ROTA) for the study
period was 0.129 with a standard deviation of 0.201. The mean of size for the study period was
2.645 with a standard deviation of 0.762. The mean of Tangibility (TAN) for the study period was
1.088 with a standard deviation of 0.346.

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 Determinants of Capital Structure Evidence from Indian Stock Market

5.1.4.2 Inter-correlation matrix: the current study revealed that the coefficient of correlation
between BR and NDTS was >0.60. Rest of the independent variables did not have correlation
coefficient >0.60. this indicates that the collinearity issue was not there to run the regression
model.

Regression results:

R2 for Technology sector was 1.53% meaning that of the variation in debt equity ratio is captured
by independent variables. F test was statistically significant. The major determinants of Debt
Equity Ratio(DER) in Technology Industries Sector Were Business Risk (BR), Effective Tax Rate
(ETR), Growth Rate (GR), Size (SZ), And Tangibility (TAN). However, Current Ratio (CR),
Dividend Pay-Out Ratio (DPR), Non-Debt Tax Rate (NDTS), Profitability (PR) was not
statistically significant.

Independent variables such Current Ratio, Effective Tax Rate, Profitability and Non-Debt Tax
Shield (NDTS) have negative coefficient meaning that they share inverse relationship with the
Debt Equity Ratio. However, independent variables such as Business Risk (BR), Dividend Pay-
Out Ratio (DPR), Growth Rate (GR), Size (SZ) and Tangibility (TAN) have positive coefficients
meaning that they share direct relationship with Debt Equity Ratio.

Residuals diagnostics: (i) there is no serial correlation in the data set; (ii) data is homoscedastic
and (iii) data is not normally distributed.

5.1.5 FOOD AND BEVERAGE SECTOR:

5.1.5.1 Descriptive statistics: the mean of Business Risk ratio for the study period was with a
standard deviation 237.0887. The mean of Current ratio for the study period was with a standard
deviation 2.727076. The mean of Debt Equity Ratio for the study period was-3.788 with a standard
deviation of 122.408. The mean of Dividend Pay-out Ratio (NT) for the study period was 15.754
with a standard deviation of 54.884. The mean of ET Rate for the study period was 0.169 with a
standard deviation of 0.258. The mean Growth Rate on assets for the study period was 1.111 with
a standard deviation of 0.568. The mean of NDTS for the study period was 354.481 with a standard
deviation of 1148.464. The mean of Return on Total Assets (PR_ROTA) for the study period was

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 Determinants of Capital Structure Evidence from Indian Stock Market

0.097 with a standard deviation of 0.288. The mean of size for the study period was 2.955 with a
standard deviation of 0.565. The mean of Tangibility (TAN) for the study period was 1.11197 with
a standard deviation of 0.568125.

5.1.5.2 Inter-correlation matrix: the current study revealed that the coefficient of correlation
Rest of the independent variables did not have correlation coefficient >0.60. this indicates that the
collinearity issue was not there to run the regression model.

Regression results:

R2 for Food and Beverage sector was 0.468% meaning that of the variation in Debt Equity Ratio
is captured by independent variables. F test was statistically significant. The major determinants
of Debt Equity Ratio in Food and Beverage Sector Were Business Risk (BR), Dividend Pay-Out
Ratio (DPR), Growth Rate (GR), Profitability (PR), And Tangibility (TAN). However, Current
Ratio (CR), Effective Tax Rate (ETR), Non-Debt Tax (NDTS) rate and Size (SZ) were not
statistically significant.

Independent variables such Size have negative coefficient meaning that they share inverse
relationship with the Debt Equity Ratio. However, independent variables such as Business Risk
(BR), Current Ratio (CR), Dividend Pay-Out Ratio (DPR), Effective Tax Rate (ETR), Growth
Rate (GR), Non-Debt Tax Shield (NDTS), Profitability (PR) and Tangibility (TAN) have positive
coefficients meaning that they share direct relationship with Debt Equity Ratio (DER).

Residuals diagnostics: (i) there is no serial correlation in the data set; (ii) data is homoscedastic
and (iii) data is not normally distributed.

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 Determinants of Capital Structure Evidence from Indian Stock Market

5.2 CONCLUSION
Financial managers have the biggest challenge to choose the optimum capital structure that
produces high returns. The perfect combination of debt and equity in the capital structure is an
optimal capital structure. The company value depends on its expected income flow, and the rate
used to discount the income flows is the rate of return or capital cost required by the company.
This allows the decision on the capital structure to influence the company value either by changing
its expected revenue or capital cost or by changing both. Decision makers should therefore have
an idea of the different determinants of their target company's capital structure which will help
them value the company. The study entitled “Determinants of Capital Structure

Evidence from Indian Stock Market” was undertaken with an intention to understand the
impact of independent variables Current Ratio, Profitability, TG, Growth Rate, SIZE, Non-Debt
Tax Sheet, Dividend Payout Ratio, Effective Tax Rate and Business Risk on the Financial
Leverage of the firm. The data collected from each selected sector (media, technology,
engineering, production, food, and beverage) have been collected by the researcher in order to
fulfil these objectives. For each sector we have taken all the companies listed on either BSE or
NSE platform with debt component have been chosen and the data has been collected for the past
ten years (from 2010-2019). MS Excel and E-Views applications collecting the collected data.

Statistical methods including multiple regression and inter correlation matrix were commonly used
in research. The relation between debt-to - equity relations and their determinants (current ratio,
profitability, TG, growth rate, SIZE, non-debt tax sheet, dividend payout ratio, ETR and Business
Risk) has been examined through multiple regressions. The correlation between the independent
variables was used to detect the correlation coefficient to test the multiple linearity.

5.2.1 MEDIA SECTOR:

The study revealed that in Media sector the independent variables Non Debt Tax Sheet,
Profitability and Tangibility have negative coefficients meaning that they share inverse
relationship with Financial Leverage. However, variables such as Business Risk, Current Ratio,
Dividend Pay-Out Ratio, Effective Tax Return, Growth Rate and Size share positive coefficient
meaning that they share direct relationship with Financial Leverage. Regression Result shows that

88 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

independent variables such as Current Ratio, Growth Rate, Profitability and Size were statistically
significant. Therefore, the variables Current Ratio, Growth rate Profitability and Size were the
major determinants of Financial Leverage.

5.2.2 ENGINEERING SECTOR:

The study revealed that in Engineering sector the independent variables business risk and
profitability have negative coefficients meaning that they share inverse relationship with Financial
Leverage. However, variables such Current Ratio, Dividend Pay-Out Ratio, Effective Tax Rate,
Growth Rate, Non-Debt Tax Shield, Size and Tangibility, share positive coefficient
meaning that they share direct relationship with Financial Leverage. Regression Result shows
that independent variables such as Current Ratio, Growth Rate, Profitability, Size were statistically
significant. Therefore, the variables Current Ratio, Growth Rate, Profitability, Size were the major
determinants of Financial Leverage.

5.2.3 MANUFACTURING SECTORS:

The study revealed that in Manufacturing sector the independent as Non-debt tax shield,
Profitability and Tangibility have negative coefficients meaning that they share inverse
relationship with Financial Leverage. However, variables such as Business Risk, Current Ratio,
Dividend Pay-Out Ratio, Effective Tax Rate, Growth Rate and Size share positive coefficient
meaning that they share direct relationship with Financial Leverage. Regression Result shows that
independent variables such Current Ratio, Growth Rate, Profitability and Size Tangibility were
statistically significant. Therefore, the Current Ratio, Growth Rate, Profitability and Size
Tangibility were the major determinants of Financial Leverage.

5.2.4 TECHNOLOGY SECTOR:

The study revealed that in Technology sector the independent variables Current ratio, Effective
tax rate, Profitability and Non-debt tax shield have negative coefficients meaning that they share
inverse relationship with Financial Leverage. However, variables such Business Risk, Dividend
Pay-Out Ratio, Growth Rate, Size and Tangibility share positive coefficient meaning that they
share direct relationship with Financial Leverage. Regression Result shows that independent

89 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

variables such as Effective Tax Rate, Growth Rate, Size, and Tangibility were statistically
significant. Therefore, the variables as Effective Tax Rate, Growth Rate, Size, and Tangibility
were the major determinants of Financial Leverage.

5.2.5 FOOD AND BEVERAGE SECTOR:

The study revealed that in Food and Beverage sector the independent variable size has negative
coefficients meaning that share inverse relationship with Financial Leverage. However, variables
such as Business Risk, Current Ratio, Dividend Pay-Out Ratio, Effective Tax Rate, Growth Rate,
Non-Debt Tax Shield, Profitability and Tangibility share positive coefficient meaning that they
share direct relationship with Financial Leverage. Regression Result shows that independent
variables such as Business Risk, Dividend Pay-out Ratio, Profitability, and Tangibility were
statistically significant. Therefore, the variables Business Risk, Dividend Pay-out Ratio,
Profitability, and Tangibility were the major determinants of Financial Leverage.

This study provides an idea for decision makers to take decisions about capital structure
determinants and their impact on the debt equity ratio (leverage) of companies in selected
sectors. During mergers and acquisitions, the acquiring companies will examine the financial
strength of the business to be purchased and compare it to traditional methods with the help of
techniques such as Pecking Order Theory, Agency Cost and Static Trade-Off Theory. There
would be a win-win situation for both decision makers and the investment community as a whole
if these suggestions were incorporated.

90 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

5.3 SUGGESTIONS

5.3.1 FOR MEDIA SECTOR:

The study revealed that in Media sector the independent variables Business Risk, Current Ratio,
Dividend Pay-Out Ratio, Effective Tax Return, Growth Rate and Size have positive coefficients
meaning that they share direct relationship with Financial Leverage. Therefore, before taking the
leverage decisions the managers must take these variables very seriously. Regression Result
shows that independent variables Business Risk, Current Ratio, Growth Rate Profitability and Size
are significant at conventional level. Therefore, the variables Business Risk, Current Ratio,
Growth Rate Profitability and Size should be taken into consideration before taking the debt
financing decisions.

5.3.2 FOR ENGINEERING SECTOR:

The study revealed that in Engineering sector the independent variables Current Ratio, Dividend
Pay-Out Ratio, Effective Tax Rate, Growth Rate, Non-Debt Tax Shield, Size and Tangibility, have
positive coefficients meaning that they share direct relationship with Financial Leverage.
Therefore, before taking the leverage decisions the managers must take these variables very
seriously. Regression Result shows that independent as Business Risk, Non-debt Tax Shield, Size,
and Tangibility are significant at conventional level. Therefore, the variables as Business Risk,
Non-debt Tax Shield, Size, and Tangibility should be taken into consideration before taking the
debt financing decisions.

5.3.3 FOR MANUFACTURING SECTOR:

The study revealed that in Manufacturing sector the independent variables Business Risk, Current
Ratio, Dividend Pay-Out Ratio, Effective Tax Rate, Growth Rate and Size have positive
coefficients meaning that they share direct relationship with Financial Leverage. Therefore, before
taking the leverage decisions the managers must take these variables very seriously. Regression
Result shows that independent variables Business Risk, Current Ratio, Growth Rate, Profitability
and Size are significant at conventional level. Therefore, the Business Risk, Current Ratio, Growth

91 MPBIM
 Determinants of Capital Structure Evidence from Indian Stock Market

Rate, Profitability and Size should be taken into consideration before taking the debt financing
decisions.

5.3.4 FOR TECHNOLOGY SECTOR:

The study revealed that in Technology sector the independent such Business Risk, Dividend Pay-
Out Ratio, Growth Rate, Size and Tangibility have positive coefficients meaning that they share
direct relationship with Financial Leverage. Therefore, before taking the leverage decisions the
managers must take these variables very seriously. Regression Result shows that independent
variables Business Risk, Effective Tax Rate, Growth Rate, Size, and Tangibility are significant at
conventional level. Therefore, the variables Business Risk, Effective Tax Rate, Growth Rate, Size,
and Tangibility should be taken into consideration before taking the debt financing decisions.

5.3.5 FOR FOOD AND BEVERAGE SECTOR:

The study revealed that in Food and Beverage sector the independent variables Business Risk,
Current Ratio, Dividend Pay-Out Ratio, Effective Tax Rate, Growth Rate, Non-Debt Tax Shield,
Profitability and Tangibility have positive coefficients meaning that they share direct relationship
with Financial Leverage. Therefore, before taking the leverage decisions the managers must take
these variables very seriously. Regression Result shows that independent variables Business Risk,
Dividend Pay-out Ratio, Growth Rate, Profitability, and Tangibility are significant at conventional
level. Therefore, the variables Business Risk, Dividend Pay-out Ratio, Growth Rate, Profitability,
and Tangibility should be taken into consideration before taking the debt financing decisions.

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 Determinants of Capital Structure Evidence from Indian Stock Market

BIBLIOGRAPHY

➢ Dr. G S Popli and Mr. Gajendra Kumar Jaiswal (2012) ‘Determinants of Corporate
Capital Structure of Indian Industries’.
➢ Anshu Handoo and Kapil Sharma (2014), IIMB- ‘A Study on determents of Capital
Structure in India’. www.sciencedirect.com.
➢ Ashok kumar Panigrahi, Asian Journal of Management Research-‘Capital Structure of
Indian Corporates: Changing Trends.
➢ Hashemi Tilehnouei Mostafa and Shivraj Boregowda, Research Journal of recent
Sciences- ‘A Brief Review of Capital Structure Theories.
➢ Jacinta Chan Phooi M’ng, Mahfuzur Rahman and Selvam Sannacy (2017)- The
Determents of Capital Structure: Evidence from public listed companies in Malaysia,
Singapore and Thailand.

93 MPBIM
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 PROGRESS REPORT 1

Sl. No. Particulars

1 Name of the Student SANKETKUMAR B H
2 Registration Number MB183710
3 Name of College Guide DR. SATHYANARAYANA S
4 Name and contact no of the Co-
Guide/External Guide
(Corporate)

5 Title of the Dissertation DETERMINANTS OF CAPITAL

STRUCTURE EVIDENCE FROM INDIAN
STOCK MARKET
6 Brief note on Introduction of the The most important issues in corporate finance is
Topic (100 word) responding "How do firms choose their capital
structure?” Locating the optimal capital structure
have for a long time been a focus of attention in
many academic and financial institutions that
probe into this area. It is very important to know
the relationship between capital structure and its
determinants to find out which determinants are
to be given much importance while deciding the
capital structure.

7 Progress report: A brief note 1. Number of Meetings with Guides: 3

reflecting, Number of meeting
Times
with Guides, places visited,
libraries visited, books referred, 2. Libraries referred: Online libraries
meeting with persons, activities 3. Journals/Articles referred
taken up, preparations done for
collection and analysis of data • Ilya A. Strebulaev, Arthur
etc.,) Korteweg- An (S, s) Model of Capital
Structure Theory and
Evidence∗,Graduate School of Business
Stanford University , August 17, 2012.
 • Anshu Handoo , Kapil Sharma A- study
on determinants of capital structure in
India,IIMB Management
Review,03/August/2014
• Ashok Kumar Panigrahi -
Capital Structure of Indian
Corporate: Changing Trends, Asian
Journal of Research.
4. Work done during the period:
• Chapter 1 – Introduction to the topic,
Theoretical background of the study,
Importance, need for the study is
completed.
• Chapter 2 – Review of literature is
under process, statement of problem,
objectives of the study, Scope of the
study is completed. Data collection is
under process.

Date: 08/05/2020

Signature of Candidate Signature of the Guide

 PROGRESS REPORT 2

Sl. No. Particulars

1 Name of the Student SANKETKUMAR B H
2 Registration Number MB183710
3 Name of College Guide DR. SATHYANARAYANA S
4 Name and contact no of the Co-
Guide/External Guide
(Corporate)
5 Title of the Dissertation DETERMINANTS OF CAPITAL
STRUCTURE EVIDENCE FROM INDIAN
STOCK MARKET
6 Brief note on Introduction of the The most important issues in corporate finance is
Topic (100 word) responding "How do firms choose their capital
structure?” Locating the optimal capital structure
have for a long time been a focus of attention in
many academic and financial institutions that
probe into this area. It is very important to know
the relationship between capital structure and its
determinants to find out which determinants are
to be given much importance while deciding the
capital structure.

7 Progress report: A brief note 5. Number of Meetings with Guides: 6

reflecting, Number of meeting
Times
with Guides, places visited,
libraries visited, books referred, 6. Libraries referred: Online libraries
meeting with persons, activities 7. Journals/Articles referred
taken up, preparations done for
collection and analysis of data • Ilya A. Strebulaev, Arthur
etc.,) Korteweg- An (S, s) Model of Capital
Structure Theory and
 Evidence∗,Graduate School of Business
Stanford University , August 17, 2012.
• Anshu Handoo , Kapil Sharma A- study
on determinants of capital structure in
India,IIMB Management
Review,03/August/2014
• Ashok Kumar Panigrahi -
Capital Structure of Indian
Corporate: Changing Trends, Asian
Journal of Research.
8. Work done during the period:
• Chapter 1 – Introduction to the topic,
Theoretical background of the study,
Importance, need for the study is
completed.
• Chapter 2 – Review of literature is
completed, statement of problem,
objectives of the study, Scope of the
study is completed.
• Chapter 4- Data collection is completed
and the analysis part is under process
and most of the analysis is done.

Date: 27/05/2020

Signature of Candidate Signature of the Guide