Anu sahi abstract the main objective of this paper is to analyze the factors determining the capital structure of indian companies. The paper explores a vast body of literature in articulating critical issues in capital structure decision. It involves the decision to invest the current funds for addition, disposition, modification or replacement of fixed assets. Key factors influencing capital structure decision and capital. Factors affecting capital structure decisions request pdf. Most favourable proportion determines the optimum capital structure. Key factors influencing capital structure decision and. I highlight how the agency problem affects the capital structure of a company and. There are multiple related factors which affect capital structure decisions. This article examines the international determinants of capital structure using a large sample of firms from 37 countries. Capital structure decision is one of the crucial decisions that finance managers have to make.
Factors affecting capital structure decisions norton 1991. The factors affecting capital budgeting 7350 words bartleby. Generalised method of moments gmm has been applied to find out the firm specific factors affecting financing decisions of smes in india. The study used homogeneous panel of 39 thai companies in real estate industry listed in the stock exchange of thailand set during the period 2002 to 2009. Factors affecting cost of capital fundamental, economic. Factors affecting capital structure size of company small companies may have to rely on the founders money but as they grow they will be eligible for longterm financing because larger companies are considered less risky by investors.
A firms ability to pay expenses and loans determines debt capacity. Dec 24, 2019 link between investment and financing decisions. So factors affecting capital structure decision of a firm are interrelated with dividend policy. There are a number of rules which are to be considered while deciding the financing pattern. Financial leverage it refers to proportion of debt in the overall capital. Chapter iii concepts and theories of capital structure and profitability.
Factor analysis uncovers nine factors explaining 66. It is the employment of an asset source of finance for which. Besides the above, the nature and size of the firm may have a direct effect on the capital structure composition, for instance, public utility concerns e. Depending on your company and the industry you operate in a financial manager has to determine what level of debt is good for your capital structure. Capital structure of the business affects the profitability and financial risk. Capital structure decisions are very important for companies to make. Empirical evidence from selected indian firms international journal of marketing, financial services and management research, vol.
Determinants of capital structure a study of manufacturing. To identify the various factors influencing investment decisions of retail investors 2. Capital structure a reading prepared by pamela peterson drake outline 1. The prime focus of the study is to empirically examine the factors affecting the capital structure decisions of small and medium enterprises smes in india. It implies that the company uses a mix of debt capital, preference capital and equity capital, wherein the longterm debt adds to the equity shareholders earnings per share. When the proportion of debt in the total capital is high then the firm is called highly levered firm but when the proportion of debts in the total capital is less, then the firm will be called low levered firm. The capital structure decision is a continuous process.
Graham associate professor of finance, fuqua school of business, duke university, durham, nc 27708 usa campbell r. Under the capital structure, decision the proportion of longterm sources of capital is determined. The result shows that there are five behavioral factors affecting the investment decisions of individual investors at the ho chi minh stock exchange. Internal factors refer to those factors which are related with internal conditions of the firm such as nature of business, size of business, expected return, cost and risk, asset structure of business, structure of ownership, expectations about regular and steady earnings, age of the firm, liquidity in company funds and its working capital. This factor may affect the capital structure decisions. Generally companies use the concept of financial leverage to set up capital structure. The capital structure of financing pattern decision is a significant managerial decision. For instance, a business functioning monopolistic competition market where profit is. Key factors influencing capital structure decision and its. Findings indonesian firms do practice target capital structure and are influenced by firmspecific factors like profitability, business risk, firm size, liquidity and share price performance due to timevarying factors. So, even companies in the same industry can have significantly different structures of capital. Moreover, there are certain common factors which are to be considered while designing capital structure e.
Capital budgeting is a companys formal process used for evaluating potential expenditures or investments that are significant in amount. Aswath damodaran 3 the objective in decision making n in traditional corporate finance, the objective in decision making is to maximize the value of the firm. These findings provide evidence in favour of trade off theory and pecking order theory. Abstract this article examines the international determinants of capital structure using a large sample of. The reliable determinants for leverage are firm size, tangibility, industry leverage, profits, and inflation. Factors affecting the decisions surrounding capital investment projects. As a result, the market value of the share may be affected by the capital structure decision.
For instance, a business functioning monopolistic competition market where profit is low, it must prefer shareholders capital. Request pdf factors affecting capital structure decisions introduction capital structure theories survey evidence a more structured approach. Goyal abstract this paper examines the relative importance of many factors in the capital structure decisions of publicly traded american firms from 1950 to 2003. Factors affecting capital structure 1 cash flow position. There is a tendency for organizations is some industries such as air transport, auto and trucks to use more debt than those in other industries. Capital investment factors definition investopedia.
Capital structure and corporate financing decisions. This article throws light upon the top seventeen factors determining the capital structure. Highly geared companies those companies whose proportion of equity. The factor loadings in dicate that tax implications, managements desire for flexibility, and market concerns affect capital structure decisions. Factors affecting capital structure of a firm capital. The large expenditures include the purchase of fixed assets like land and. Factors affecting capital structure decisions your business. Jun 15, 2018 internal factors refer to those factors which are related with internal conditions of the firm such as nature of business, size of business, expected return, cost and risk, asset structure of business, structure of ownership, expectations about regular and steady earnings, age of the firm, liquidity in company funds and its working capital. Some of the inter factors affecting the capital structure decisions of a company are. Pdf the main objective of this paper is to analyze the factors determining the capital structure of indian companies. Factors affecting capital structure decisions norton, edgar 19910801 00. But there are always some other factors which firms take into consideration while making capital structure decisions. Factors affecting capital structure decisions norton.
Identify the organizational factors affecting the efficiency of human capital a case study of the recreational and cultural organization of isfahan municipality ali atafar,saeed sharifi faculty member department of managment, university of isfahan, iran. This paper analyzes the capital structure determinants of manufacturing, merchandising and service firms operating in istanbul stock exchange. I highlight how the agency problem affects the capital structure of a company and find further support for the market timing theory. Factors affecting capital structure decisions mba lectures. Factors affecting capital structure decisions wiley online library.
To suggest the policy makers, to come up with lot of innovative investment avenues based on the influencing factors of investment decisions of retail investors v. A the objective of this empirical study is to analyze the factors affecting capital. What influences the capital structure and the pecking order among high growth, listed smes in sweden. The factors influencing and importance of financial decisions. This paper starts from the economic environment and characteristics of small and mediumsized enterprises, discuss es the internal and external factors affecting the capital structure of small and mediumsized enterprises and put s forward the countermeasures and suggestions for optimizing capital structure of small and mediumsized enterprises. The factor loadings indicate that tax implications, managements desire for flexibility, and market concerns affect capital structure decisions.
Factors affecting the capital structure the dependent variable are. This analysis is grounded on agency theory and pecking order theory. To formulate a theoretical perspective for examining the keys factors in influencing capital structures decisions and how do firms adjust their capital structure. Capital structure capital structure means the proportion of dept and equity used for financing the operations of business. Determining the factors affecting capital structure decisions of. I find that macroeconomic factors gain exceptional significance for good and bad decisions prior a change in the state of economy and prove that winners had a better economic forecast. Factors influencing investment decisions of retail investors. This paper investigates the significant factors influencing capital structure decision of the listed real estate companies and the speed of adjustment towards their target level. Second, it is likely that patterns of corporate financing decisions have changed over the decades. They concluded that versions of the trade off theory.
Factors affecting capital structure decision of a firm. A study on factors driving the capital structure decisions of. Factors affecting the capital structure of a company. That happens to be the need of the company because eps happens to be the maximum on it.
The effect of macroeconomic factors on capital structure. Jun 26, 2015 factors affecting capital structure decisions. When the stock is traded and markets are viewed to be efficient, the objective is. Exploring the underlying factors affecting capital structure decision. Effective capital structure decisions decrease the cost of capital and hence the value of a firm increases. First, starting with a long list of factors from the prior literature, we examine which factors are reliably signed, and reliably important, for predicting leverage. Capital structure decisions are affected by many factors and as youll see determining optimal capital structure is not an exact science. Pdf determining the factors affecting capital structure decisions. A best capital structure is the one which results in maximizing the value of equity shareholder or which brings rise in the price of equity shares.
The real state companies usually use general purpose assets as it makes good collateral. Most of these factors have moderate impacts whereas market factor has high influence. Factors affecting capital structure decisions, the financial. Firms consider this factor at the time of capital structure decisions.
Companies use a variety of methods to raise capital needed to finance operations and expansion. Bonds pay interest to investors until the maturity date. So, even companies in the same industry can have significantly different structures of. Introduction capital structure refers to the different options used by a firm in financing its assets bhaduri, 2002. Analysis on the factors affecting the capital structure of. The form of market structure, the company, is operating into, determines its capital structure.
Making capital budgeting and capital structure decisions 9919 words 40 pages. This paper contributes to our understanding of capital structure in several ways. On the maturity date, the company must pay the full redemption value back to the investor. Capital structure is referred to as the ratio of different kinds of securities raised by a firm as longterm finance. Jul 01, 2015 capital budgeting is a companys formal process used for evaluating potential expenditures or investments that are significant in amount.
Capital structure meaning and factors determining capital. The capital structure involves two decisions type of securities to be issued are equity shares, preference shares and long term borrowings debentures. The practical implication of this study is to increase knowledge on what factors companies value with regard to capital structure decisions. Herding, market, prospect, overconfidencegambles fallacy, and anchoringability bias. Pdf corporate capital structure remains a controversial issue in modern corporate finance. A rapid adjustment toward target leverage is detected. Prepared for the journal of applied corporate finance vol.
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