Determinants of Capital Structure- Experience of Indian Cotton Textile Industry

Abstract

The present study has two objectives: Firstly, to identify important determinants of capita/. structure and secondly to test for the applicability of trade-off and pecking order theories based on sample data drawn from the Indian Cotton Textile Industry for the five year period 2003- 04 to 2007-08: Multiple Regression Analysis and Step-wise regression analysis have been carried out taking total debt to equity ratio as the dependent variable. Profitability, growth opportunities, liquidity and business risk turned out to be the most important determinants, followed by non-debt tax shield and uniqueness. Only firm size and asset structure, two of the eight explanatory variables of the study, were not found to be significant even at ten percent level. On the basis of the signs of the regression coefficients trade-off theory has been found to be applicable, rather than pecking order theory, a position upheld by other empirical research works in the area.