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Capital structure dynamics of Indian corporates

Neelam Rani (Department of Finance, Indian Institute of Management Shillong, Shillong, India)
Surendra S. Yadav (Department of Management Studies, IIT Delhi, New Delhi, India)
Naliniprava Tripathy (Indian Institute of Management Shillong, Shillong, India)

Journal of Advances in Management Research

ISSN: 0972-7981

Article publication date: 12 November 2019

Issue publication date: 23 March 2020

1270

Abstract

Purpose

The purpose of this paper is to examine the capital structure determinants and speed of adjustment (SOA) toward the target capital structure of firms.

Design/methodology/approach

The study has used the generalized method of moments (GMM) model and two-stage least squares (TSLS) to the panel data of 3,310 Indian firms, from January 2000 to March 2018, to determine the adjustment speed toward target capital structure. Further, the study employed a fully modified ordinary least square technique to shed light on the dynamic nature of the adjustment process.

Findings

The results of the GMM estimations indicate that Indian firms are adjusting their capital structure toward the target rate of 10.38 percent per year. Similarly, the findings of TSLS estimate specify a SOA of 15.49 percent per year. The low adjustment speed suggests the prevalence of higher adjustment costs of Indian firms.

Research limitations/implications

Future research can be undertaken by including certain macroeconomic factors such as GDP, inflation and the interest rate, which also affect the SOA since firms are pretentious by market conditions while designing capital structure for firms.

Practical implications

In the current financial and regulatory set-up when there are frequent perturbations in the capital market, the study will be valuable for regulators, firms and academicians. The work would enable the concerned stakeholders to manage their scare resources and capital effectively by a better way to make informed decisions. It will facilitate managers of young companies to identify and regulate the factors that are more pertinent for them to make flexible financial decisions concerning the capital structure.

Originality/value

The study amplifies on previous studies and provides new insights on the speed of the adjustment process of Indian firms, helping to modify and refine their capital structures toward the optimum capital structure. This will not only enhance the financial flexibility in the capital structure of Indian corporates but also be of great value to the policymakers and other stakeholders.

Keywords

Citation

Rani, N., Yadav, S.S. and Tripathy, N. (2020), "Capital structure dynamics of Indian corporates", Journal of Advances in Management Research, Vol. 17 No. 2, pp. 212-225. https://doi.org/10.1108/JAMR-12-2017-0125

Publisher

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Emerald Publishing Limited

Copyright © 2019, Emerald Publishing Limited

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