Capital Structure Choice in an Emerging Economy: Some Evidence from the Indian Corporate Sector

Abstract:     
Most of the existing empirical research on capital structure has been largely confined to the United States and a few other advanced countries. This paper provides evidence on the capital structure choice of a Less Developed Country, India, which is a unique hybrid of market-based systems of the US and the UK and the bank-oriented systems of Japan and Germany. The financial liberalization process in India has also provided us a natural opportunity to analyze and compare the explanatory power of many main stream capital structure theories by testing them in two different kinds of market conditions; i.e. in the pre and post financial liberalization period of India. A sample of 418 firms is used for this study. The results indicate that predictions of the theories appear to fare little better during the period of financial market liberalization than during the period subject to significantly more controls and distortions.

JEL Classification: G30

working papers series