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The Impact of Capital Structure on Profitability with Special Reference to IT Industry in India vs. Domestic Products

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  • Ramachandran Azhagaiah

    (Kanchi Mamunivar Centre for Post Graduate Studies, Puducherry, India.)

  • Candasamy Gavoury

    (Kanchi Mamunivar Centre for Post Graduate Studies, Puducherry, India.)

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    Abstract

    Firms can use either debt or equity capital to finance their assets. The best choice is a mix of debt and equity. The present study mainly analyses how far the capital structure (CS) affects the Profitability (P) of corporate firms in India. The study tries to establish the hypothesized relationship as to how far the CS affects the business revenue of firms and what the interrelationship is between CS and Profitability. This study is carried out after categorizing the selected firms into three categories based on two attributes, viz. business revenue and asset size. First, firms are grouped into low, medium and high based on business revenue. Second, firms are classified into small, medium and large based on asset size to establish the hypothesized relationship that CS has significant impact on Profitability of Information Technology (IT) firms in India. For the study, a sample of 102 it firms was chosen by the Multi- Stage Sampling Technique. The data for a period of 8 years ranging from 1999–2000 to 2006–2007 have been collected and considered for analysis. Regression Analysis (to analyze the unique impact of CS on Profitability), in addition to descriptive statistics such as Mean, Standard Deviation, and Ratios has been used. The study proves that there has been a strong one-to-one relationship between CS variables and Profitability variables, Return on Assets (ROA) and Return on Capital Employed (ROCE) and the CS has significant influence on Profitability, and increase in use of debt fund in CS tends to minimize the net profit of the IT firms listed in Bombay Stock Exchange in India.

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    Bibliographic Info

    Article provided by University of Primorska, Faculty of Management Koper in its journal Managing Global Transitions.

    Volume (Year): 9 (2011)
    Issue (Month): 4 (Winter) ()
    Pages: 371-392

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    Handle: RePEc:mgt:youmgt:v:9:y:2011:i:4:p:371-392

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    Related research

    Keywords: capital structure; profitability; return on assets; return on capital employed; debt; equity;

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    References

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    1. Brander, J.A. & Poitevin, M., 1988. "Managerial Compensation and the Agency Costs of Debt Finance," Cahiers de recherche 8827, Universite de Montreal, Departement de sciences economiques.
    2. F. Voulgaris & D. Asteriou & G. Agiomirgianakis, 2002. "Capital structure, asset utilization, profitability and growth in the Greek manufacturing sector," Applied Economics, Taylor & Francis Journals, vol. 34(11), pages 1379-1388.
    3. Mihaela Dragota & Andreea Semenescu, 2008. "A Dynamic Analysis of Capital Structure Determinants. Empirical Results for Romanian Capital Market," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 4(4(521)), pages 65-80, April.
    4. Masulis, Ronald W., 1980. "The effects of capital structure change on security prices : A study of exchange offers," Journal of Financial Economics, Elsevier, vol. 8(2), pages 139-178, June.
    5. Saumitra Bhaduri, 2002. "Determinants of capital structure choice: a study of the Indian corporate sector," Applied Financial Economics, Taylor & Francis Journals, vol. 12(9), pages 655-665.
    6. D. E. Allen, 1991. "The Determinants of the Capital Structure of Listed Australian Companies: The Financial Manager's Perspective," Australian Journal of Management, Australian School of Business, vol. 16(2), pages 103-128, December.
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