The Debt-Equity Choice : An Empirical Analysis of Indian Companies

Debt-equity choice is one of the most important decisions in financing policy. Studies on capital structure have made great contributions in understanding the behavior of firms with respect to their choice among the use of debt or equity. The present study analyses the financing pattern of 300 Indian private sector companies, comprising of 20 different sectors for the period 1999-2000 to 2007-2008, duly grouping them on the basis of their region, size, age, and nature. By using simple financial and statistical tools like ratio, funds flow and correlation analysis, effort has been made to find out the ways in which different companies at different times and in different institutional environments have financed their operations; and to identify possible implications of these financing patterns. The result shows that, leverage is negatively correlated with profitability. Tangibility is positively correlated with the total debts. The dependence on debt capital is more by manufacturing companies as compared to service sector companies. There is a negative correlation between the size of the company and dependence on debt capital. Larger the size of the company, lower is the debt equity ratio and vice-versa. Hence, as a result of debt-dominated capital structure, the Indian corporate are exposed to a very high degree of total risk as reflected in high degree of operating leverage and financial leverage and, consequently, are subject to a high cost of financial distress which includes a broad spectrum of problems ranging from relatively minor liquidity shortages to extreme cases of bankruptcy