An introduction is made to capital structure, and information is given on the Indian capital structure specifically.
Chapter 3, the data methodology, provides the methodology that was used for the data. The reasons behind the methodology and what was studied are both discussed.
Chapter 4, data analysis and findings, is the chapter in which the results of the data analysis are presented.
Chapter 5, the conclusion, provides not only a conclusion to the research that was conducted in this paper but questions that are left and areas for further research in the future.
Literature Review
The rationale for this literature review chapter is for the author to review academic articles and books relating to capital structure theory so as to develop a framework of academic theory which can be used as a basis of analysis. Without a clear understanding of what has already been done the researcher may rehash old ground, miss something that was already discussed, or fail to tie things that are being discovered now into things that were discovered earlier -- or questions that were asked in the past but not answered.
Introduction to Capital Structure
A company's financial stability and risk of insolvency depend on its financing sources, as well as the types and amounts of various assets it owns. Capital structure, which depicts the equity and loan financing of a company, is often measured in terms of the relative magnitude of these various financing sources. In his study "Capital Structure," Stewart C. Myers (2001), examines research relating to the mix of securities and financing sources corporations use to finance real investment.
Most current research on capital structure focuses "on the proportion of debt vs. equity observed on the tight-hand sides of corporations' balance sheets" (Myers, p. 81). According to Myers, no universal theory of the debt-equity choice exists and there are no reasons to anticipate one. In other words, Myers believes that asset base and capital structure have no correlation that holds true for all companies. While the research will not be able to confirm or deny that statement here, he will work to show that there are correlations between capital structure and asset base and that these are differentiated based on the type of company in question (i.e. manufacturing vs. service businesses).
Murray Frank and Vidhan Goyal (2003), investigated the importance of 39 different factors in the leverage decisions made by publicly traded U.S. firms. They then argued that the pecking order and market timing theories that are often used by analysts failed to provide high-quality descriptions of the data sets that are typically analyzed. In the study "Capital Structure Decisions," Frank and Goyal (2003) note that evidence from their study proves to be consistent with tax/bankruptcy trade-off theory as well as with stakeholder co-investment theory.
The study by Frank and Goyal (2003) also enhanced the understanding of capital structure in the following four primary ways:
1. It created a level playing field that includes various factors. Much of the analysis is devoted to determining which factors are reliably designated, and reliably important, for predicting leverage.
2. It offered good reason to suspect that patterns of corporate financing decisions may have changed over the decades.
3. It indicated that many firms had incomplete records leading to the common practice of deleting firms for which some of the necessary data items are missing. This can create a missing-data-bias.
4. It offered the argument that different theories applied to firms under different circumstances.
While all four of those points are valuable, it is point four which the researcher wishes to stress. When a universal theory of capital structure is said to exist, it becomes very questionable as to whether the data used to arrive at this conclusion are truly accurate. The argument that no universal theory of capital structure exists is much more logical, but a number of useful conditional theories do exist. They are worth examining.
Indian Capital Structure
The opening up of the Indian economy in the 1990s led to a series of financial sector reforms, the most prominent of which was the capital market reform. These reforms have brought about the development of the Indian equity markets, and attempted to raise them to the standards of the major global equity markets. It all started with the abolition of the post for the Controller of Capital Issues, as this subsequently created free pricing of shares. The dematerialization of shares, leading to faster and cheaper transactions, and the introduction of derivative products and compulsory rolling settlements have all followed closely behind. Unfortunately, the Indian markets are still not widely respected, and there are serious...
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