Determinants of debt capital in Indian corporate sector: a quantile regression analysis

Krishnankutty, Raveesh and Chakraborty, Kiran Shankar (2013): Determinants of debt capital in Indian corporate sector: a quantile regression analysis.

Abstract

Capital obtained from borrowing is called debt capital. Many studies in the past as well as present provided immense evidence about the determinants of capital structure of a firm. In this scenario the present study looking in to the determinants of debt capital in the capital structure. The analysis is based on data collected from 213 listed companies of Bombay Stock Exchange 500 index using capital line data base during the period 2002-2011. Most of the variables show skewed and Kurtic distribution the study relied upon quantile regression analysis as an appropriate tool to find the determinants of debt capital. The study found that for the quantile ranging from 0.05th, 0.25th, 0.50th, 0.75th, and 0.95th. We found that long-term leverage, assets structure and size are positively determining the debt capital at 0.05th quantile. For the quarter quantile (0.25th) and median quantile (0.50th) Financial risk, long term leverage and size are positively and debt capacity is negatively determine the debt capital. More over financial risk and long-term leverage are positively determining the debt capital for 075th quantile. However in case of highest quantile (0.95th) long-term leverage and non-debt tax shield are positively determine the debt capital mean while debt capacity is negatively determine the debt capital.

• Item Type: MPRA Paper
• Language: English
• Keywords: debt capital, quantile regression, Bombay stock exchange, capital structure, Indian corporate sector.
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

References

Azevedo, J.P.W. (2004), “grqreg: Stata module to graph the coefficients of a quantile regression”, Boston College Department of Economics.

Barclay, M.J. and Smith, C.W. (1996), “On financial architecture: Leverage, maturity and priority”, Journal of Applied Corporate Finance, Vol. 8, pp.4–17.

Bennett, M. and Donnelly, R. (1993), “The determinants of capital structure: Some UK evidence”, British Accounting Review, Vol. 25, pp.43–59.

Bevan, A.A. and Danbolt, J. (2002), “Capital structure and its determinants in the UK - a decompositional analysis”, Applied Financial Economics, Vol. 12 No. 3, pp.159-170.

Bevan, A.A. and Daubolt, J. (2001), “Testing for inconsistencies in the estimation of UK capital structure determinants”, Working Paper, No. 2001/4, Department of Accounting and Finance, University of Glasgow, Glasgow G 12 *LE.

Booth, L., Aivazian, V., Demirguc-Kunt, A., and Maksimovic, V. (2001), “Capital structures in developing countries”, Journal of Finance, Vol. 56 No. 1, pp. 87–130.

Bradley, M., Jarrell, G. and Kim, E.H. (1984), “On the existence of an optimal capital structure: Theory and evidence”, Journal of Finance, Vol. 39, pp.857 - 878.

Buchinsky, M. (1994), “Changes in the U.S. wage structure 1963-1987: Application of quantile regression,” Econometrica, Vol. 62, pp. 405-458.

Buchinsky, M. (1998), “Recent advances in quantile regression models: A practical guide for empirical research”, Journal of Human Resources,Vol. 33 No. 1, pp. 88-126.

Campello, M. and Giambona, E. (2010), “Capital structure and the redeployability of tangible assets”, http://papers.ssrn.com/sol3/papers.cfm , retrieved on 1 Nov.2011.

Chang, C. (1999), “Capital structure as optimal contracts”, North American Journal of Economics and Finance, Vol. 10, pp.363-85.

Chittenden, F., Hall, G. and Hutchinson, P. (1996), “Small firm growth, access to capital markets and financial structure: Review of issues and an empirical investigation”, American Economic Review, Vol. 76, No. 2, pp.323–339.

Crutchley, C.E. and Hanson, R.S. (1989), “A test of the agency theory of managerial ownership, corporate leverage and corporate control”, Financial Management, Vol. 18, pp.36–46.

Delcoure, N. (2007), “The determinants of capital structure in transitional economies”, International Review of Economics & Finance, Vol. 16, No. 3, pp. 400-415.

Drobertz, W. and Fix, R. (2003), “What are the determinants of the capital structure? Some evidence for Switzerland”, Working Paper, No. 4103, WXYZ / Department of Finance University of Basel.

Easterbrook, F. (1984), “Two-agency cost explanations of dividends”, American Economic Review, Vol. IA, pp. 650-659.

Frank, M.Z. and Goyal, V.K. (2003), “Testing the pecking order theory of capital structure”, Journal of Financial Economics, Vol. 67, pp.217-248.

Grossman, S. and Hart, O. (1982), “Corporate financial structure and managerial incentives’, in McCall, J. (Ed.), Economics of Information and Uncertainty, Chicago: University of Chicago Press.

Hao, L., and Naiman, D. Q. (2007), Quantile regression, Thousand Oaks, Calif: Sage Publications.

Harris, M. and Raviv, A. (1991), “The theory of the capital structure”, Journal of Finance, Vol. 46, pp.297-355.

Hovakimian, A. Opler, T. and Titman, S. (2001), “The debt-equity choice”, Journal of Financial and Quantitative Analysis, Vol. 36 No. 1, pp. 1–24.

Huang, G. and Song, F.M. (2006), “The determinants of capital structure: Evidence from China”, China Economic Review, Vol. 17 No. 1, pp 14-36.

Jensen, M. and Meckling, W. (1976), “Theory of the firm: Managerial behaviour, agency costs and capital structure”, Journal of Financial Economics, Vol. 3, pp.305-60.

Jensen, M., Solberg, D. and Zorn, T. (1992), “Simultaneous determination of insider ownership, debt and dividend policies”, Journal of Financial and Quantitative_Analysis,Vol. 27, pp. 247-261.

Jensen, M.C. (1986), “Agency costs of free cash flow, corporate finance, and takeovers”, Small Business Economics, Vol. 8, pp. 59-67.

Kester, C.W. (1986), “Capital and ownership structure: A comparison of united states and Japanese manufacturing corporations”, Financial Management, Vol. 15, pp.5–16.

Koenker, R. and Bassett, G. (1978), “Regression quantiles”, Econometrica, Vol. 46, pp. 33–50.

Koenker, R. and Hallock, K.F. (2001), “Quantile regression,” J Econ Perspect, Vol. 15, pp. 143–156.

Kremp, E., Stöss, E. and Gerdesmeier, D. (1999), “Estimation of a debt function: Evidence form French and German firm panel data”, in Sauvé, A. and Scheuer, M. (Ed.), Corporate Finance in Germany and France, Frankfurt-am-Main and Paris: Deutsche Bundesbank and Banque de France.

Long, M. and Maltiz, L.(1985), “The investment-financing nexus: Some empirical Evidence”, Midland Corporate Finance Journal, Vol. 3, pp. 53-59.

Michaeles, N., Chittenden, F. and Poutziouris, P. (1999), “Financial policy and capital structure choice in UK smes: Empirical evidence from company panel data”, Small Business Economics, Vol. 12, pp.113–30.

Modigliani, F. and Miller, M.H. (1958), “The cost of capital, corporate finance, and the theory of investment”, American Economic Review, Vol. 48, pp.261–97.

Mosteller, F. and Tukey, J. (1977), Data Analysis and Regression, Addison-Wesley, Reading, MA.

Myers, S.C. (1984), “The capital structure puzzle”, Journal of Finance, Vol. 39, pp.575–592.

Noulas, A. and Genimakis, G. (2011), “The determinants of capital structure choice: Evidence from Greek listed companies”, Applied Financial Economics, Vol. 21, No. 6, pp 379-387.

Omet, G. and Mashharawe, F. (2002), “The capital structure choice in tax contrasting environments: Evidence from the Jordanian, Kuwanti, Omani and Sandi corporate sectors”, The Economic Research Form 10* Annual Conference, December (Marrakesh, Morocco).

Ozkan, A. (2001), “Determinants of capital structure and adjustment to long run target: Evidence from UK company panel data”, Journal of Business Finance & Accounting, Vol. 28, No. 1-2, pp. 175–198.

Rajan, R. and Zingales, L. (1995), “What do we know about capital structure?- Some evidence from international data”, Journal of Finance, Vol. 50, pp.1421-1460.

Timan, S. and Wessels, R. (1988), “The determinants of capital structure choice”, Journal of Finance, Vol. 43, pp. l-19.

Toy, N., Stonehill, A., Remmers, L., Wright, R. and Beekhuisen, T. (1974), “A comparative international study of growth, profitability and risk as determinants of corporate debt ratios in the manufacturing sector”, Journal of Financial and Quantitative Analysis, Vol. 9, pp.875–86.

Wald J.K. (1999), “How firm characteristics affect capital structure: an international Comparison”, Journal of Financial Research, Vol. 22, pp.161-187.

Warner, J.B. (1977), “Bankruptcy costs: Some evidence”, Joumal of Finance,Vol. 32, pp. 337-347.

Wiwattanakantang, Y. (1999), “An empirical study on the determinants of the capital structure of Thai firms”, Pacific-Basin Finance Journal, Vol. 7, pp.371-403.