New evidences on determinants of capital structure from the Indian manufacturing industry

In the backdrop of Make in India push by Indian government the purpose of this study is to examine the determinants of capital structure towards a better understanding of financing decisions to be undertaken by the Indian manufacturing firms. The data for the analysis is drawn from COSPI manufacturing index of Centre for Monitoring Indian Economy (CMIE). Our sample is an unbalanced panel of 1077 firms over the period 2000-01 to 2012-13. We apply system-GMM to study different factors that affect the leverage decision of firms in India. The findings of the study reveals that the choice of optimal capital structure can be influenced by factors such as profitability, size, growth, tangibility, non-debt tax shields, uniqueness and signal. We also find the existence of both pecking order theory and static trade-off theory in the case of Indian manufacturing firms. The results thus obtained are robust across the different proxies of leverage.