Determinants of Capital Structure –Evidence from Listed Information Technology Firms in India

Abstract

This paper studies the leverage decisions of Indian information technology (IT) sector firms. It attempts to explain the variation in capital structure of IT firms and determining variables using a regression model. It aims to explore the various factors that determine the choice of long term financing for listed firms. The impact of firms’ tangibility, size, profitability, liquidity and earning variability on capital structure of listed Information Technology is investigated. Data of 30 IT firms from 2009-2014 is studied through regression analysis. Multi co-linearity test was performed at first to find out any relation among variables and it was found that none of the variables are strongly correlated, then regression test was run. Profitability is reported to have significantly negative impact while other factors have insignificant positive effect on capital structure. The results are mostly consistent with much of the previous literature. The outcome shows that all these determinants affect the capital structure of a firm in some degree. The study also indicates that firm leverage is positively related to median industry leverage. Additionally, firm size and growth opportunities have positive relationship with firm leverage. On the other hand, profitability and leverage are negatively related. The results support pecking order theory as higher profitability firms tend to have less debt and firms with higher growth opportunities tend to have greater leverage.

Keywords: Leverage, liquidity, profitability, regression, tangibility.