This paper examines the issue of corporate financial structure and its determinants by studying the
association between observed leverage and a set of explanatory variables. The present study attempts to go
beyond previous studies that are mainly confined to manufacturing firms by studying the capital structure
choice of Indian banking sector. It makes an attempt to determine the critical factors of capital structure
by using an exploratory factor analysis on a sample of 82 Indian Banks comprising of public sector banks,
private and foreign banks for a period of seven years from 1996 to 2002. The results of the study suggest
that liquidity, size, efficiency and growth, quality of assets, profitability and service diversification are the
most critical factors influencing the capital structure of the Indian banking firms.
Capital structure is arguably one of the most significant subjects in modern finance. This
is reflected not only in the formal recognition that it has received in recent years but also
in the attention that it has continued to receive from researchers for over four decades
now. How a firm determines its capital structure continues to be a puzzle for researchers
(Myers, 1984).
The pioneering work of Modigliani and Miller (1958) illustrates that the valuation of
a company will be independent of its financial structure under a set of perfect market
assumptions. Once these fundamental assumptions are relaxed, capital structure becomes
relevant. Under such market imperfections, firms will attempt to select levels of debt and
equity in order to reach an optimal capital structure (M&M, 1963).
Most of the empirical work on capital structure has been largely confined to the United
States and a few other advanced countries. The existing literature in corporate finance still
lacks adequate depth in empirical research on the issue of capital structure choice in
Indian firms. The few existing empirical research on capital structure in Indian context
is mainly confined to the manufacturing firms. Very little work has been done in the
context of Indian service sector in general and banking sector in particular. This created
a need for investigating the capital structure of Indian banking industry in depth. |
