Determinants of Capital Structure of Indian P...

Determinants of Capital Structure of Indian Pharmaceutical Industry: A Panel Data Regression Analysis

Author Name : Dr. Rajbinder Kaur, Mr. Deep Patra, Mr. Adish Prasad

ABSTRACT

This paper analyses the determinants of capital structure of Pharmaceutical industry based on 21 BSE listed companies have been selected from 500 top Indian companies; listing of which are based on highest turnover for the year 2021 and it was published in the Economic Times of India as ET 500 List on 22^nd December, 2021 over 5 years’ study period i.e., from 2017-18 to 2021-22, applying Panel Data Regression Method. This study has investigated the impact of eight firm-specific determinants on capital structure and analyses the determinants of capital structure in consideration of three capital structure theories, like Trade-Off Theory, Pecking Order Theory and Agency Cost Theory. The study reveals profitability, size, growth and non-debt tax shield are major and statistically significant determinants of Pharmaceutical industry. Profitability appears as a significant determinant in determining the capital structure of the Pharmaceutical industry, and this robust negative linkage, supported by the Pecking Order Theory, indicates that larger proportion of profits is likely to raise the internal fund for financing future investment proposals and, therefore, less reliance on external funds. The positive and statistically significant relationship between growth and leverage is found which is inconsistent with expected result, however, confirmed by the Pecking Order Theory. This suggests that internal capital is retained for financing new investment plans, and thus asset growth is funded by debt capital. The significantly positive linkage between non-debt tax shield and leverage is against the prediction of Trade-Off Theory and signifies that non-debt tax shield cannot be used as a substitute for debt financing.

Keywords: Capital Structure, Determinants, India, Panel Data Regression Technique