Location as a Determinant of Capital Structure: A Study of Indian Private Sector Firms

Abstract

 Capital structure of a firm is determined by various internal and external factors. The macro variables of the economy of a country like tax policy of government, inflation rate, capital market condition, are the major external factors that affect the capital structure of a firm. The characteristics of an individual firm, which are termed as micro factors (internal), also affect the capital structure of enterprises. These factors include size of the firm, age of the firm, growth rate, business risk, profitability, leverage etc. But, whether the location of a firm affects its capital structure decisions and if yes than how and why is the subject matter of this paper. The present study is aimed at to understand the importance of location of the firm in making capital structure decisions of Indian companies. We propose to analyze the capital structure of 300 Indian private sector companies, comprising of 20 different sectors for the period 1999-2000 to 2007-2008, duly grouping them on the basis of their regions in which they are located. In this study, we try to find out the ways in which different companies at different times and in different institutional environments have financed their operations; and to identify possible implications of these financing patterns. The central issue we address is to examine the location variable  that influence the capital structure decisions of Indian companies and check whether the region to which the company belongs has a bearing on its capital structure or not.