Capital Structure and Exchange Rate Risk An Empirical Analysis of Indian Non- Financial Firms

Abstract

The paper aims at capturing exchange rate risk and then studies its impact on firms' capital structure specifically considering firms' choice between debt and equity as the source of business financing with respect to its exchange rate risk irrespective of the degree of its international involvements, considering a sample of 295 Indian non-financial manufacturing firms over a period 1995-2011 . The study.finds approximately 75 % of firms are exposed negatively and approximately 25 % firms are exposed positively to exchange rate risk. Firm s' who are the net importers having negative exchange rate Beta have higher leverage than firms who are net exporters with positive Betas. All firms whether it is positively or negatively exposed have lower profitability and are more fragile during exchange rate depreciation. The study also finds the evidence that Indian non-financial exporting firms are exhibiting significant growth than importing.firms with the prevailing exchange rate structure.