A Study of the Determinants of Capital Structure of Selected Cement Companies in India

Singh, Netra Pal; Babbar, Alka

Abstract

Capital structure poses many challenges for companies. An appropriate mix of equity and debt is one of the most premeditated decisions for any organization. A wrong decision may hamper the growth of the company. There are many factors that must be taken into cognizance in determining the right mix of equity and debt. The Indian cement industry consists of a large number of small and big firms; however, 23 listed prominent cement companies are selected to identify relevant determinants of capital structure in the present study. Based on the analysis, it was found that factors such as growth, asset tangibility, tax rate, profitability, liquidity, size, cost of debt, and interest coverage ratio have a significant impact on the capital structure of the selected cement companies.

Keywords

References

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Ahmad, N., & Aris, Y. W. (2015). Does age of the firm determine capital structure decision? Evidence from the Malaysian trading and service sector. International Business Management, 9(3), 200–207.
Ahmed, N., Ahmed, Z., & Ahmed, I. (2010). Determinants of capital structure: A case of the life insurance sector of Pakistan. European Journal of Economics, Finance and Administrative Sciences, 24, 7–12.
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Bhaduri, S. (2002). Determinants of capital structure choice: a study of the Indian corporate sector. Applied Financial Economics, 12(9), 655-665. https://doi.org/10.1080/09603100010017705
Bhayani, S. J. (2005). Determinants of capital structure: An empirical analysis of Indian private corporate sector. Asia Pacific Business Review, 1(2), 13-23. https://doi.org/10.1177/097324700500100203
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DeAngelo, H., & Masulis, R. W. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics, 8(1), 3–29. https://doi.org/10.1016/0304-405x(80)90019-7
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Modigliani, F., & Miller, M.H. (1963). “Corporate income taxes and the cost of capital-a Correction”, American Economic Review, 53(3), pp. 433-443.
Modigliani, F., & Miller, M. (1977). Debt and taxes. Journal of Finance, 32(2), 261-276.
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Siddiqui, S. S. (2012). Capital Structure Determinants of Non-Bank Financial Institutions (NBFIs) in Bangladesh. World Review of Business Research, 2(1), 60-78.
Sinha, S., & Samanta, P. K. (2014). Determinants of Capital Structure of Selected Indian Cement Companies-A Quantile Regression Approach.
Song, H. S. (2005). Capital structure determinants an empirical study of Swedish companies. KTH Royal Institute of Technology.
Srinivas, N. K. (2014). A study of capital structure pattern of small and medium enterprises (SMEs). IOSR Journal of Economics and Finance, 5(6), 19–23.
Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance, 43(1), 1–19. https://doi.org/10.1111/j.1540-6261.1988.tb02585.x

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[1] Ahmad, F., & Abbas, Z. (2011). Role of firm-level characteristics in determining the capital structure of banks: Evidence from Pakistani banks. Interdisciplinary Journal of Contemporary Research in Business, 2(12), 201–216.

[2] Ahmad, N., & Aris, Y. W. (2015). Does age of the firm determine capital structure decision? Evidence from the Malaysian trading and service sector. International Business Management, 9(3), 200–207.

[3] Ahmed, N., Ahmed, Z., & Ahmed, I. (2010). Determinants of capital structure: A case of the life insurance sector of Pakistan. European Journal of Economics, Finance and Administrative Sciences, 24, 7–12.

[4] Babbar, A., & Singh, N. P. (2024). The Relationship between Capital Structure and Financial Performance of Cement Industry in India, NATURALISTA CAMPAN, 28(2): 59-77. DOI: 10.5281/zenodo.10981374 https://doi.org/10.5281/zenodo.10981374

[5] Baker, H. & Martin, G. (2011). Capital Structure and Corporate Financing Decisions: Theory, еvidence, and Practice, John Wiley, and Sons.Baral, K. J. (2004). Determinants of capital structure: A case study of listed companies in Nepal. The Journal of Nepalese Business Studies, 1(1):1–13.

[6] Barclay, M. J., & Smith, C. W. (2005). The capital structure puzzle: The evidence revisited. Journal of Applied Corporate Finance, 17(1), 8–17. https://doi.org/10.1111/j.1745-6622.2005.012_2.x

[7] Bauer, P. (2004). Determinants of capital structure: empirical evidence from the Czech Republic. Czech Journal of Economics and Finance (Finance a uver), 54(1-2), 2-21.

[8] Bennett, M., & R. Donnelly, (1993), “The Determinants of Capital Structure: Some UK Evidence”, British Accounting Review, pp. 43-59. https://doi.org/10.1006/bare.1993.1005

[9] Bhaduri, S. (2002). Determinants of capital structure choice: a study of the Indian corporate sector. Applied Financial Economics, 12(9), 655-665. https://doi.org/10.1080/09603100010017705

[10] Bhayani, S. J. (2005). Determinants of capital structure: An empirical analysis of Indian private corporate sector. Asia Pacific Business Review, 1(2), 13-23. https://doi.org/10.1177/097324700500100203

[11] Chadha, S., & Sharma, A. K. (2015). Determinants of capital structure: An empirical evaluation from India. Journal of Advances in Management Research, 12(1), 3–14. https://doi.org/10.1108/jamr-08-2014-0051

[12] De Miguel, A., & Pindado, J. (2001). Determinants of capital structure: New evidence from Spanish panel data. Journal of Corporate Finance, 7(1), 77–99. https://doi.org/10.1016/s0929-1199(00)00020-1

[13] DeAngelo, H., & Masulis, R. W. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics, 8(1), 3–29. https://doi.org/10.1016/0304-405x(80)90019-7

[14] Driffield, N., & Pal, S. (2001). The East Asian crisis and financing corporate investment: is there a cause for concern? Journal of Asian Economics, 12(4), 507-527. https://doi.org/10.1016/s1049-0078(01)00099-9

[15] Frank, M. Z., & Goyal, V. K. (2009). Capital structure decisions: Which factors are reliably important? Financial Management, 38(1), 1–37. https://doi.org/10.1111/j.1755-053x.2009.01026.x

[16] Handoo, A., & Sharma, K. (2014). A study on determinants of capital structure in India. IIMB Management Review, 26(3), 170–182. https://doi.org/10.1016/j.iimb.2014.07.009

[17] Hossain, M. F., & Ali, M. A. (2012). Impact of Firm Specific Factors on Capital Structure Decision: An Empirical Study of Bangladeshi Companies. International Journal of Business Research and Management,3(4), 163-182.

[18] Hussain, I., & Hussain, A. (2015). Determinants of capital structure and testing of theories: A study on listed manufacturing companies in Bangladesh. International Journal of Economics and Finance, 7(4), 176–190.

[19] Jain, A., & Khalsa, S. A. (2019). A study of the capital structure pattern of selected Indian companies. Journal of Emerging Technologies and Innovative Research (JETIR), 6(5), 289–305.

[20] Jensen, M. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review, 76(2), 323-329.

[21] Jensen, M., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405x(76)90026-x

[22] Kumar, S., Colombage, S., & Rao, P. (2017). “Research on capital structure determinants: a review and future directions”, International Journal of Managerial Finance, 13(2): 106-132. https:// doi.org/10.1108/IJMF-09-2014-0135

[23] Lima, M. (2009). An Insight into the Capital Structure Determinants of the Pharmaceutical Companies in Bangladesh. GBMF Conference.

[24] Marsh P. (1982). “The Choice between Equity and Debt: An Empirical Study”, Journal of Finance, 37, pp. 121-144

[25] Mishra, C. S. (2011). Determinants of capital structure: A study of manufacturing sector PSUs in India. In Proceedings of the 2011 International Conference on Financial Management and Economics (IPEDR, Vol. 11). IACSIT Press.

[26] Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261–297.

[27] Modigliani, F., & Miller, M.H. (1963). “Corporate income taxes and the cost of capital-a Correction”, American Economic Review, 53(3), pp. 433-443.

[28] Modigliani, F., & Miller, M. (1977). Debt and taxes. Journal of Finance, 32(2), 261-276.

[29] Modugu, K. P., & Eragbhe, E (2015). Determinants of capital structure decision: A Research Synthesis, Journal of Policy, and Development Studies, 9(1), 84-98 https://doi.org/10.12816/0011168

[30] Myers S. C., and Majluf N S. (1984). “Corporate financing and investment decisions when firms have information that investors do not have”, Journal of Financial Economics, 13:187-221.

[31] Myers, S.C. (1984). “The capital structure puzzle”, Journal of Finance, 39, pp .575-592

[32] Niresh, J., & Velnampy, T. (2012). “The Relationship between Capital Structure & Profitability”, Global Journal of management and Business Research, 12(13): 66-73

[33] Panigrahi, A. K. (2013). Relationship between inventory management and profitability: An Empirical Analysis of Indian cement companies. Asia Pacific Journal of marketing and management Review 2(7) 107-120.

[34] Rajan, R.G., & Zingales, L. (1995). What Do We Know About Capital Structure? Some Evidence from International Data. The Journal of Finance, 50(5), Pp. 1421-1460.

[35] Sayeed, A. M. (2011). The Determinants of Capital Structure for Selected Bangladeshi Listed Companies. International Review of Business Research Papers, 7(2), 21-36.

[36] Sibindi, A. B. (2016). Determinants of capital structure: A risk governance & control: Financial markets and institutions, 228-239.

[37] Siddiqui, S. S. (2012). Capital Structure Determinants of Non-Bank Financial Institutions (NBFIs) in Bangladesh. World Review of Business Research, 2(1), 60-78.

[38] Sinha, S., & Samanta, P. K. (2014). Determinants of Capital Structure of Selected Indian Cement Companies-A Quantile Regression Approach.

[39] Song, H. S. (2005). Capital structure determinants an empirical study of Swedish companies. KTH Royal Institute of Technology.

[40] Srinivas, N. K. (2014). A study of capital structure pattern of small and medium enterprises (SMEs). IOSR Journal of Economics and Finance, 5(6), 19–23.

[41] Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance, 43(1), 1–19. https://doi.org/10.1111/j.1540-6261.1988.tb02585.x