Multi Objective Capital Structure Modelling: A Goal Programming Approach

41 Pages Posted: 17 Mar 2010

See all articles by K. C. Iyer

K. C. Iyer

affiliation not provided to SSRN

Surendra S. Yadav

Indian Institute of Technology (IIT), Delhi - Department of Management Studies

Yamini Agarwal

Indian Institute of Finance (IIF); Finance India; Indian Institute of Technology (IIT Delhi)

Date Written: March 16, 2010

Abstract

Capital structure decisions have become complex in the changing business paradigm. The evaluation techniques used for capital structure decisions by the theories and models developed in the 1950s have lost their relevance due to changes over the years. Capital is still scarce despite financial liberalization and globalization. Business environment are exceedingly competitive. Stakeholders are awfully demanding. Survival and growth is restrained by competition. Decision maker's choice on capital structures is not restricted to debt and equity alone. Bankruptcy and distress risk go beyond on balance sheet items including off balance sheet exposures. In the light of this background the premise of a single objective for evaluating capital structure decision is questioned in this study. The study explores the multiple considerations followed by decision maker for capital structure decisions.

The study investigates capital structure practices in the Indian industry through a sample of top 500 companies classified in 19 industries for a 10 year period (1998-2007) for 67 variables including the leverage variables. The spread of leverage ratio is also examined. The relationship of leverage ratios with market capitalization and EPS is also explored.

Multi objective criteria for processing capital structure decisions is identified and justified based on the findings of the past researches and the empirical survey conducted as a part of this study. In the empirical survey, CFOs as respondents are investigated for their goals, priorities, motivations, constraints and practices for capital structure decision making.

Goal Programming model was selected from different multi-objective optimization techniques. The model was found to be capable of providing satisficing solutions to multiple goals simultaneously by minimizing the deviation from the objective function after assuming that the decision maker is an optimist and does not attempt to satisfy all objectives fully. Goal Programming Model has been developed and illustrated for capital structure decisions under multiple objectives.

Keywords: Capital Structure, Multiple Objectives, Goal Programming

JEL Classification: C6, G3

Suggested Citation

Iyer, K. C. and Yadav, Surendra S. and Agarwal, Yamini, Multi Objective Capital Structure Modelling: A Goal Programming Approach (March 16, 2010). Available at SSRN: https://ssrn.com/abstract=1572689 or http://dx.doi.org/10.2139/ssrn.1572689

K. C. Iyer

affiliation not provided to SSRN ( email )

Surendra S. Yadav

Indian Institute of Technology (IIT), Delhi - Department of Management Studies ( email )

Hauz Khus
New Delhi, 110016
India

Yamini Agarwal (Contact Author)

Indian Institute of Finance (IIF) ( email )

45 A, Knowledge Park III
Greater Noida, 201308
India
+91-11-27451212 (Phone)
+91-11-27454128 (Fax)

HOME PAGE: http://www.iif.edu

Finance India ( email )

Ashok Vihar II
Delhi, 110052
India
+91-11-27451313 (Phone)
+91-11-27234473 (Fax)

HOME PAGE: http://www.financeindia.org

Indian Institute of Technology (IIT Delhi) ( email )

Hauz Khas
New Delhi, Delhi 110016
India

HOME PAGE: http://www.iit.ac.in

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