Firm Size and Capital Structure: Evidence from Indian Corporate

Abstract

Many studies on capital structure suggest that there is a positive relationship between leverage and size of the firm. Marsh (1982) finds that large firms more often choose long-term debt, while small firms choose short-term debt. Large firms may be able to take advantage of economies of scale in issuing long-term debt, and may even have bargaining power over creditors. So the cost of issuing debt and equity is negatively related to firm size. In addition, larger firms are often diversified and have more stable cash flows, and so the probability of bankruptcy for larger firms is less, relative to smaller firms. This suggests that size could be positively related with leverage. This paper is an attempt to study the relationship between firm size and capital structure decisions of Indian companies. The financing pattern of 300 Indian private sector companies, comprising of 20 different sectors for the period 1999-2000 to 2007-2008, duly grouping them on the basis of their region, size, age, and nature have been analyzed to find out whether the financing decisions varies among small, medium and large firms.

Keywords: Capital structure, Indian economy, Private sector, Leverage

JEL Classification: G32