A PANEL DATA EXPLORATION OF MACROECONOMIC FACTORS INFLUENCING THE OPTIMAL CAPITAL STRUCTURE OF THE INDIAN AUTOMOTIVE SECTOR
Keywords:
Macroeconomic Determinants, Optimal Capital Structure, Indian Automotive Industry, Debt-to-Equity ratio, Wealth Maximisation.
Abstract
Economic instability in emerging economies presents substantial challenges for firms, particularly in accessing debt funding, due to heightened perceived risk. This often results in a less favorable debt-to-equity ratio and complicates the overall composition of capital structure. Macroeconomic conditions play a pivotal role in influencing investor sentiment and risk perceptions, which in turn complicate capital structure decisions. This study aims to investigate the impact of various macroeconomic variables on the capital structure decisions of firms within the Indian automobile and automobile ancillary sectors over a comprehensive 17-year period from 2004 to 2020. They are utilizing secondary data collected from reputable sources like ProwessIQ, the Reserve Bank of India, and financial reports. The study employs various statistical tools, including descriptive statistics, correlation analysis, and dynamic panel data regression models, to analyze the data. The findings indicate that macroeconomic variables significantly shape the optimal capital structure decisions in the Indian automotive sector. Key variables such as the bank rate, GDP growth rate, inflation rate, and public debt substantially impact leverage ratios. For instance, an increase in the bank rate or public debt levels correlates with higher leverage ratios, suggesting that firms adjust their capital structures in response to changes in these macroeconomic indicators. This study provides valuable insights into the complex interplay between macroeconomic conditions and capital structure financing decisions. By highlighting the significant influence of these broader economic factors, the research underscores the necessity for firms, especially in emerging economies like India, to consider these determinants when making financial decisions. The findings thus contribute to a deeper understanding of capital structure dynamics in the face of macroeconomic challenges within the Indian automotive sector.
JEL Classification Codes: G32, C58, E01.
References
Amjed, S., & Shah, S. A. (2016). The impact of volatile economic conditions on corporate capital structure adjustment towards dynamic target in Pakistan. Pakistan Journal of Commerce and Social Sciences, 10(2), 296-315. Retrieved from https://hdl.handle.net/10419/188254
Altman, E. I. (1984). A further empirical investigation of the bankruptcy cost question. Journal of Finance, 39(4), 1067-1089. https://doi.org/10.1111/j.1540-6261.1984.tb03893.x
Ayanle, A. D., Chowdhury, M. S., Imran, M. A.-, & Rahman, S. (2022). The role of microcredit and micro savings for raising microfinance sustainability in somali. Bangladesh Journal of Multidisciplinary Scientific Research, 6(1), 30-39. https://doi.org/10.46281/bjmsr.v6i1.1925
Baker, M., & Wurgler, J. (2002). Market timing and capital structure. The journal of finance, 57(1), 1-32. https://doi.org/10.1111/1540-6261.00414
Bandyopadhyay, A., & Barua, N. M. (2016). Factors determining capital structure and corporate performance in India: Studying the business cycle effects. The Quarterly Review of Economics and Finance, 61, 160–172. http://dx.doi.org/10.1016/j.qref.2016.01.004
Bokpin, G. A. (2009). Macroeconomic development and capital structure decisions of firms: Evidence from emerging market economies. Studies in economics and finance, 26(2), 129-142. https://doi.org/10.1108/10867370910963055
Camara, O. (2012). Capital structure dynamics of US-based multinationals (MNCs) and domestic (DCs) firms (Doctoral dissertation, University of St Andrews). Retrieved from https://hdl.handle.net/10023/3147
Chadha, S., & Sharma, A. K. (2016). An Empirical Study on Capital Structure in Indian Manufacturing Sector. Global Business Review, 17(2), 411–424. https://doi.org/10.1177/0972150915619817
Chaklader, B., & Chawla, D. (2016). A study of determinants of capital structure through panel data analysis of firms listed in NSE CNX 500. Vision, 20(4), 267-277. https://doi.org/10.1177/0972262916668700
Chakrabarti, A., & Chakrabarti, A. (2019). The capital structure puzzle–evidence from Indian energy sector. International Journal of Energy Sector Management, 13(1), 2-23. https://doi.org/10.1108/IJESM-03-2018-0001
DeAngelo, H., & Masulis, R. (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
Deesomsak, R., Paudyal, K., & Pescetto, G. (2014). The determinants of capital structure: evidence from the Asia Pacific region. Journal of Multinational Financial Management, 14(4-5), 387-405. https://doi.org/10.1016/j.mulfin.2004.03.001
Doan, T. T. T. (2019). Firm-specific factors as determinants of capital structure: Evidence from an emerging country. International Journal of Economics and Management Systems, 4, 298-304.
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
Ghani, E. K., Rehan, R., Salahuddin, S., & Hye, Q. M. A. (2023). Discovering Capital Structure Determinants for SAARC Energy Firms. International Journal of Energy Economics and Policy, 13(1), 135–143. https://doi.org/10.32479/ijeep.13938
Haider, S., Anjum, N., Sufyan, M., Khan, F., & Ullah, A. (2018). Impact of Macroeconomic Variables on Financial Performance: Evidence of Automobile Assembling Sector of Pakistan Stock Exchange. Sarhad Journal of Management Sciences, 4(2), 202-213. https://doi.org/10.31529/sjms.2018.4.2.6
Handoo, P. A., & Sharma, D. K. (2012). Comparison of capital structure determinants of public sector and private sector companies in India. Paradigm, 16(2), 13-23. https://doi.org/10.1177/0971890720120203
Haron, R. (2014). Capital structure inconclusiveness: evidence from Malaysia, Thailand and Singapore. International Journal of Managerial Finance, 10(1), 23–38. https://doi.org/10.1108/IJMF-03-2012-0025
Huong, P. T. Q. (2018). Macroeconomic factors and corporate capital structure: Evidence from listed joint stock companies in Vietnam. International Journal of Financial Research, 9(1), 31-40. https://doi.org/10.5430/ijfr.v9n1p31
Hussain, S., & Rahman, M. H. (2022). Are foreign aid and economic growth positively related? Empirical evidence from Bangladesh. Bangladesh Journal of Multidisciplinary Scientific Research, 5(1), 1-13. https://doi.org/10.46281/bjmsr.v5i1.1611
Jaworski, J., & Czerwonka, L. (2021). Determinants of enterprises’ capital structure in energy industry: Evidence from European Union. Energies, 14(7), 1871. https://doi.org/10.3390/en14071871
Jensen, M. C., & Meckling, W. H. (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
Kayhan, A., & Titman, S. (2007). Firms’ histories and their capital structures. Journal of financial Economics, 83(1), 1-32. https://doi.org/10.1016/j.jfineco.2005.10.007
Kraus, A., & Litzenberger, R. H. (1973). A State-Preference Model of Optimal Financial Leverage. The Journal of Finance, 28(4), 911–922. https://doi.org/10.2307/2978343
Li, L., & Islam, S. Z. (2019). Firm and industry specific determinants of capital structure: Evidence from the Australian market. International Review of Economics & Finance, 59, 425-437. https://doi.org/10.1016/j.iref.2018.10.007
Lim, T. C. (2012). Determinants of capital structure empirical evidence from financial services listed firms in China. International journal of economics and finance, 4(3), 191–203. http://dx.doi.org/10.5539/ijef.v4n3p191
Magwai, M. K. (2014). Effect of macroeconomic conditions on capital structure choice for listed South African firms (Doctoral dissertation, University of Pretoria). Retrieved from http://hdl.handle.net/2263/45234
Malinic, D., Dencic-Mihajlov, K., & Ljubenovic, E. (2013). The determinants of capital structure in emerging capital markets: evidence from Serbia. European Research Studies Journal, 16(2), 98-119. Retrieved from https://www.um.edu.mt/library/oar/handle/123456789/30868
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. Retrieved from http://www.jstor.org/stable/1809766
Modigliani, F., & Miller, M. H. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. The American Economic Review, 53(3), 433–443. Retrieved from http://www.jstor.org/stable/1809167
Mokhova, N., & Zinecker, M. (2014). Macroeconomic factors and corporate capital structure. Procedia-Social and Behavioral Sciences, 110, 530-540. https://doi.org/10.1016/j.sbspro.2013.12.897
Mukherjee, S., & Mahakud, J. (2012). Historical Market-to-Book Ratio and Corporate Capital Structure: Evidence from India. Global Business Review, 13(2), 339-350. https://doi.org/10.1177/097215091201300211
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of financial economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
Myers, S. C. (2001). Capital structure. Journal of Economic perspectives, 15(2), 81–102. https://doi.org/10.1257/jep.15.2.81
Nha, B. D., Bich Loan, N. T., & Nhung, N. T. T. (2016). Determinants of capital structure choice: Empirical evidence from Vietnamese listed companies, Society and Economy, 38(1), 29-45. https://doi.org/10.1556/204.2016.38.1.3
Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The journal of Finance, 50(5), 1421–1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x
Ramli, N. A., Latan, H., & Solovida, G. T. (2019). Determinants of capital structure and firm financial performance—A PLS-SEM approach: Evidence from Malaysia and Indonesia. The Quarterly Review of Economics and Finance, 71, 148-160. https://doi.org/10.1016/j.qref.2018.07.001
Raza, H., Hamid, Z., Shah, S. A., & Khan, S. (2021). Firm and industry specific determinants of capital structure: Empirical evidence from the listed industrial sectors of Pakistan. Indian Journal of Economics and Business, 20(2), 397-414.
Rehman, O. U. (2016). Impact of capital structure and dividend policy on firm value. Journal of Poverty, Investment and Development, 21(1), 40-57.
Sheikh, N. A., & Wang, Z. (2011). Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan. Managerial finance, 37(2), 117–133. https://doi.org/10.1108/03074351111103668
Titman, S., & Wessels, R. (1988). The Determinants of Capital Structure Choice. The Journal of Finance, 43(1), 1–19. https://doi.org/10.2307/2328319
Tomschik, D. (2015). The impact of macroeconomic variables on capital structure: A comparison between companies in E7 and G7 countries (Bachelor's thesis, University of Twente). Retrieved from https://purl.utwente.nl/essays/67363
Zafar, Q., Wongsurawat, W., Camino, D., & Elgammal, M. M. (2019). The determinants of leverage decisions: Evidence from Asian emerging markets. Cogent Economics & Finance, 7(1), 1-28. https://doi.org/10.1080/23322039.2019.1598836
Altman, E. I. (1984). A further empirical investigation of the bankruptcy cost question. Journal of Finance, 39(4), 1067-1089. https://doi.org/10.1111/j.1540-6261.1984.tb03893.x
Ayanle, A. D., Chowdhury, M. S., Imran, M. A.-, & Rahman, S. (2022). The role of microcredit and micro savings for raising microfinance sustainability in somali. Bangladesh Journal of Multidisciplinary Scientific Research, 6(1), 30-39. https://doi.org/10.46281/bjmsr.v6i1.1925
Baker, M., & Wurgler, J. (2002). Market timing and capital structure. The journal of finance, 57(1), 1-32. https://doi.org/10.1111/1540-6261.00414
Bandyopadhyay, A., & Barua, N. M. (2016). Factors determining capital structure and corporate performance in India: Studying the business cycle effects. The Quarterly Review of Economics and Finance, 61, 160–172. http://dx.doi.org/10.1016/j.qref.2016.01.004
Bokpin, G. A. (2009). Macroeconomic development and capital structure decisions of firms: Evidence from emerging market economies. Studies in economics and finance, 26(2), 129-142. https://doi.org/10.1108/10867370910963055
Camara, O. (2012). Capital structure dynamics of US-based multinationals (MNCs) and domestic (DCs) firms (Doctoral dissertation, University of St Andrews). Retrieved from https://hdl.handle.net/10023/3147
Chadha, S., & Sharma, A. K. (2016). An Empirical Study on Capital Structure in Indian Manufacturing Sector. Global Business Review, 17(2), 411–424. https://doi.org/10.1177/0972150915619817
Chaklader, B., & Chawla, D. (2016). A study of determinants of capital structure through panel data analysis of firms listed in NSE CNX 500. Vision, 20(4), 267-277. https://doi.org/10.1177/0972262916668700
Chakrabarti, A., & Chakrabarti, A. (2019). The capital structure puzzle–evidence from Indian energy sector. International Journal of Energy Sector Management, 13(1), 2-23. https://doi.org/10.1108/IJESM-03-2018-0001
DeAngelo, H., & Masulis, R. (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
Deesomsak, R., Paudyal, K., & Pescetto, G. (2014). The determinants of capital structure: evidence from the Asia Pacific region. Journal of Multinational Financial Management, 14(4-5), 387-405. https://doi.org/10.1016/j.mulfin.2004.03.001
Doan, T. T. T. (2019). Firm-specific factors as determinants of capital structure: Evidence from an emerging country. International Journal of Economics and Management Systems, 4, 298-304.
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
Ghani, E. K., Rehan, R., Salahuddin, S., & Hye, Q. M. A. (2023). Discovering Capital Structure Determinants for SAARC Energy Firms. International Journal of Energy Economics and Policy, 13(1), 135–143. https://doi.org/10.32479/ijeep.13938
Haider, S., Anjum, N., Sufyan, M., Khan, F., & Ullah, A. (2018). Impact of Macroeconomic Variables on Financial Performance: Evidence of Automobile Assembling Sector of Pakistan Stock Exchange. Sarhad Journal of Management Sciences, 4(2), 202-213. https://doi.org/10.31529/sjms.2018.4.2.6
Handoo, P. A., & Sharma, D. K. (2012). Comparison of capital structure determinants of public sector and private sector companies in India. Paradigm, 16(2), 13-23. https://doi.org/10.1177/0971890720120203
Haron, R. (2014). Capital structure inconclusiveness: evidence from Malaysia, Thailand and Singapore. International Journal of Managerial Finance, 10(1), 23–38. https://doi.org/10.1108/IJMF-03-2012-0025
Huong, P. T. Q. (2018). Macroeconomic factors and corporate capital structure: Evidence from listed joint stock companies in Vietnam. International Journal of Financial Research, 9(1), 31-40. https://doi.org/10.5430/ijfr.v9n1p31
Hussain, S., & Rahman, M. H. (2022). Are foreign aid and economic growth positively related? Empirical evidence from Bangladesh. Bangladesh Journal of Multidisciplinary Scientific Research, 5(1), 1-13. https://doi.org/10.46281/bjmsr.v5i1.1611
Jaworski, J., & Czerwonka, L. (2021). Determinants of enterprises’ capital structure in energy industry: Evidence from European Union. Energies, 14(7), 1871. https://doi.org/10.3390/en14071871
Jensen, M. C., & Meckling, W. H. (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
Kayhan, A., & Titman, S. (2007). Firms’ histories and their capital structures. Journal of financial Economics, 83(1), 1-32. https://doi.org/10.1016/j.jfineco.2005.10.007
Kraus, A., & Litzenberger, R. H. (1973). A State-Preference Model of Optimal Financial Leverage. The Journal of Finance, 28(4), 911–922. https://doi.org/10.2307/2978343
Li, L., & Islam, S. Z. (2019). Firm and industry specific determinants of capital structure: Evidence from the Australian market. International Review of Economics & Finance, 59, 425-437. https://doi.org/10.1016/j.iref.2018.10.007
Lim, T. C. (2012). Determinants of capital structure empirical evidence from financial services listed firms in China. International journal of economics and finance, 4(3), 191–203. http://dx.doi.org/10.5539/ijef.v4n3p191
Magwai, M. K. (2014). Effect of macroeconomic conditions on capital structure choice for listed South African firms (Doctoral dissertation, University of Pretoria). Retrieved from http://hdl.handle.net/2263/45234
Malinic, D., Dencic-Mihajlov, K., & Ljubenovic, E. (2013). The determinants of capital structure in emerging capital markets: evidence from Serbia. European Research Studies Journal, 16(2), 98-119. Retrieved from https://www.um.edu.mt/library/oar/handle/123456789/30868
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. Retrieved from http://www.jstor.org/stable/1809766
Modigliani, F., & Miller, M. H. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. The American Economic Review, 53(3), 433–443. Retrieved from http://www.jstor.org/stable/1809167
Mokhova, N., & Zinecker, M. (2014). Macroeconomic factors and corporate capital structure. Procedia-Social and Behavioral Sciences, 110, 530-540. https://doi.org/10.1016/j.sbspro.2013.12.897
Mukherjee, S., & Mahakud, J. (2012). Historical Market-to-Book Ratio and Corporate Capital Structure: Evidence from India. Global Business Review, 13(2), 339-350. https://doi.org/10.1177/097215091201300211
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of financial economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0
Myers, S. C. (2001). Capital structure. Journal of Economic perspectives, 15(2), 81–102. https://doi.org/10.1257/jep.15.2.81
Nha, B. D., Bich Loan, N. T., & Nhung, N. T. T. (2016). Determinants of capital structure choice: Empirical evidence from Vietnamese listed companies, Society and Economy, 38(1), 29-45. https://doi.org/10.1556/204.2016.38.1.3
Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The journal of Finance, 50(5), 1421–1460. https://doi.org/10.1111/j.1540-6261.1995.tb05184.x
Ramli, N. A., Latan, H., & Solovida, G. T. (2019). Determinants of capital structure and firm financial performance—A PLS-SEM approach: Evidence from Malaysia and Indonesia. The Quarterly Review of Economics and Finance, 71, 148-160. https://doi.org/10.1016/j.qref.2018.07.001
Raza, H., Hamid, Z., Shah, S. A., & Khan, S. (2021). Firm and industry specific determinants of capital structure: Empirical evidence from the listed industrial sectors of Pakistan. Indian Journal of Economics and Business, 20(2), 397-414.
Rehman, O. U. (2016). Impact of capital structure and dividend policy on firm value. Journal of Poverty, Investment and Development, 21(1), 40-57.
Sheikh, N. A., & Wang, Z. (2011). Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan. Managerial finance, 37(2), 117–133. https://doi.org/10.1108/03074351111103668
Titman, S., & Wessels, R. (1988). The Determinants of Capital Structure Choice. The Journal of Finance, 43(1), 1–19. https://doi.org/10.2307/2328319
Tomschik, D. (2015). The impact of macroeconomic variables on capital structure: A comparison between companies in E7 and G7 countries (Bachelor's thesis, University of Twente). Retrieved from https://purl.utwente.nl/essays/67363
Zafar, Q., Wongsurawat, W., Camino, D., & Elgammal, M. M. (2019). The determinants of leverage decisions: Evidence from Asian emerging markets. Cogent Economics & Finance, 7(1), 1-28. https://doi.org/10.1080/23322039.2019.1598836
Published
2024-08-08
How to Cite
Sahoo, T. K., Yarso, A., Das, A., Borah, N., & Gachuiwo, H. (2024). A PANEL DATA EXPLORATION OF MACROECONOMIC FACTORS INFLUENCING THE OPTIMAL CAPITAL STRUCTURE OF THE INDIAN AUTOMOTIVE SECTOR. Bangladesh Journal of Multidisciplinary Scientific Research, 9(4), 1-15. https://doi.org/10.46281/bjmsr.v9i4.2239
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2024 Tapas Kumar Sahoo, Awungshi Yarso, Arijeet Das, Navajit Borah, Happyson Gachuiwo
This work is licensed under a Creative Commons Attribution 4.0 International License.
