Pdf determining the factors affecting capital structure decisions. Capital structure meaning, gearing, factors for determining. Factors that determine the capital structure among micro. Firms consider this factor at the time of capital structure decisions. Capital structure has to be decided initially at the time when a company is. Companies use a variety of methods to raise capital needed to finance operations and expansion. Hence, it should be borrowed as per the firms potential to pay. This sort of signalling can affect how outside investors view the firm as a potential investment, and once again must be considered by the people in charge of the firm when making capital structure decisions. Hence, it should be borrowed as per the firms potential to. There are two broad views on the impact of capital structure on the performance of firms, while one asserts the significance of capital structure in determining firms. The capital structure must be so simple to manage and easily understandable to the interested parties. Factors affecting capital structure decisions your business. Whether you own a donut shop or are considering investing in publiclytraded stocks, its the knowledge you simply musthave if you want to. Capital structure decisions are affected by many factors and as youll see determining optimal capital structure is not an exact science.
Tradeoff and pecking order have always dominated the capital structure decisions but recent. So factors affecting capital structure decision of a firm are interrelated with dividend policy. The capital structure involves two decisionstype of securities to be issued are equity shares, preference shares and long term borrowings debentures. The finding reveals that firms have optimal capital structure decision model. Bonds pay interest to investors until the maturity date. The results revealed that the use of debt financing by sri lankan firm is significantly low and this is largely due to the use of less long term debt.
This paper examines the relative importance of many factors in the capital structure decisions of publicly traded american firms from 1950 to 2003. That happens to be the need of the company because eps happens to be the maximum on it. The patterns of corporate capital structures around the world are also discussed. A company may choose to look to its owners who have equity to raise the funds, by asking them to forgo their dividend payout and instead reinvest their earnings to drive. The paper takes into consideration dependent variable being debt equity ratio and independent variables viz. The capital structure puzzle is unravelled and a clear picture is presented in terms of why capital structure matters. Capital structure meaning and factors determining capital. The purpose of this study is to identify the factors that determine the capital structure of lowcost airlines. The mix of debt and equity used to finance the companys future profitable investment opportunities is referred to as capital structure. The objectives of the study were to identify easy pdf. Tests of the pecking order theory have not been able to show that it is of firstorder importance in determining a firms capital. Abstract capital budgeting is necessary for large, long term investment projects. To gain insight into the factors affecting capital structure choice, responses from a fortune 500 survey are analyzed using factor analysis and.
This study adds to existing literatures to verify the claim of traditional theory of capital structure. Abstract this article examines the international determinants of capital structure using a large sample of. In this article you can find complete details for capital structure like meaning of capital structure, capital structure gearing, details for highly geared companies, low geared companies, size of a company, condition of economy, condition of sales, legal provisions etc. 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 determining financial structure of a company mba. Capital structure definition the capital structure is how a firm finances its overall operations and growth by using different sources of funds. There are four main financial decisions capital budgeting or long term investment decision application of funds, capital structure or financing decision procurement of funds, dividend decision distribution of funds and working capital management decision in order to accomplish goal of the firm viz. Further, the firms financial requirement and the cost of capital are the two factors which are helpful in determining the source and amount of capital to be raised. Most favourable proportion determines the optimum capital structure.
View 3a1 capital structure meaning and factors determining capital structure. The key division in capital structure is between debt and equity. Factors affecting capital structure decisions wiley online library. Capital structure is referred to as the ratio of different kinds of securities raised by a firm as longterm finance. Exploring the underlying factors affecting capital structure decision. The traditional school, at one extreme, argues that there is an optimum capital structure at. Key factors influencing capital structure decision and capital. Jun 26, 2015 the main objective of this paper is to analyze the factors determining the capital structure of indian companies. Factors affecting capital structure decision of a firm.
Factors affecting the capital structure the dependent variable are. The theory and practice of corporate capital structure january 2006. However, the capital structure does not affect the enterprise value under tobins q. Determining the factors affecting capital structure decisions of real sector companies operating in ise article pdf available july 2017 with 1,167 reads how we measure reads. Determining an appropriate mix of equity and debt is one of the most strategic decisions public interest entities are confronted. Under the capital structure, decision the proportion of longterm sources of capital is determined. This research focuses on important factors in determining the capital structure. This article throws light upon the top seventeen factors determining the capital structure. Each type of capital has its benefits and drawbacks, and a substantial part of wise corporate stewardship and management is attempting to find the perfect. The decision related to composition of capital structure also depends upon the ability of business to generate enough cash. Also a conclusion can be given about the importance of the theories. Capital structure decision the decision concerning the form of financing to be utilized, the amount to be raised and the proportion in which they are to be raised in the overall capitalization, is termed as capital structure decision. Determining the factors affecting capital structure decisions of. To truly understand the idea of capital structure, the dupont model provides insight into how capital structure represents one of the three components in determining the rate of return a company will earn on the money its owners have invested in it.
The traditional school, at one extreme, argues that there is an optimum capital structure at which the value of the firm is highest. The main objective of this paper is to analyze the factors determining the capital structure of indian companies. Aug 30, 2014 factors determining financial structure of a company capital structure refers to the mixture of long term funds represented by equity share capital, preference share capital and long term debts. In addition to this, the firm should employ debt to such a level that does not harm the firms solvency. As there cannot be uniformity regarding capital structure decision, which suit the requirements of all companies, capital structure should be formed to suit the needs of every individual company together with giving due place to borrowed funds in its capital structure factors determining capital structure. This analysis is grounded on agency theory and pecking order theory. So, even companies in the same industry can have significantly different structures of.
Factors affecting capital structure of a firm capital. 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. Important factors in determining the capital structure of. Factors affecting capital structure decision of a firm are therefore critical to financial analysis. Factors determining capital structure and corporate performance in india. Relative ratio of securities can be determined by process of capital gearing. Accordingly, it is aimed to test the factors that determine the capital structure in lowcost airlines in the context of capital structure theories.
What factors are influencing the determination of capital. Jul 01, 2015 capital budgeting usually involves calculation of each projects future accounting profit by period, the cash flow by period, the present value of cash flows after considering time value of money, the number of years it takes for a projects cash flow to pay back the initial cash investment, an assessment of risk, and various other factors. It is the employment of an asset source of finance for which. 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. But there are always some other factors which firms take into consideration while making capital structure decisions.
These findings provide evidence in favour of trade off theory and pecking order theory. There are different factors that affect a firms capital structure, and a firm should attempt to determine what its optimal or best mix of financing. At the same time, research also showed that corporate profitability is influenced by other factors, not just the capital structure, such as sales growth and company size, which are. On the maturity date, the company must pay the full redemption value back to the investor.
The empirical evidence seems reasonably consistent with some versions of the tradeoff theory of capital structure. Pdf the main objective of this paper is to analyze the factors determining the capital structure of indian companies. Factors affecting the capital structure of a company. Capital structure theories the debate on optimal capital structure that leads to maximum market valuation and minimum cost of capital is perennial. Types of financial decisions in financial management. Pdf factors determining capital structure and corporate. Determinants of capital structure mba knowledge base. This paper analyzes the capital structure determinants of manufacturing, merchandising and service firms operating in istanbul stock exchange. The capital structure theory says what the source of money. Using a balanced panel data of 1594 indian corporate firms over 14 years 1998 to 2011, we find empirical evidence to support the hypotheses relating to the relevance of asymmetric information, agency cost, trade off theory, signaling and liquidity aspects in determining firms capital structure decisions in emerging market economy. Capital structure decision is one of the crucial decisions that finance managers have to make. Factors determining capital structure and corporate.
Key factors influencing capital structure decision and. Feb 27, 2017 factors affecting capital structure 1. The capital structure involves two decisions type of securities to be issued are equity shares, preference shares and long term borrowings debentures. 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. Industry leverage, firm size, growth opportunity, and asset tangibility have positive. Capital structure considerations boundless finance. Most of the results are in line with what was expected, except for the variables tangibility, free cash flow and priority shares. Pdf determining the factors affecting capital structure. Pdf corporate capital structure remains a controversial issue in modern corporate finance. An overview kennedy prince modugu department of accounting faculty of management sciences university of benin nigeria abstract capital structure decision poses a lot of challenges to firms. Capital structure decisions are very important for companies to make. The factors affecting capital budgeting 7350 words. The degree of importance of the different theories is also included, from this can be concluded which theory has the most explaining power in determining the capital structure of dutch companies. Capital budgeting usually involves calculation of each projects future accounting profit by period, the cash flow by period, the present value of cash flows after considering time value of money, the number of years it takes for a projects cash flow to pay back the initial cash investment, an assessment of risk, and various other factors.
Study the impact of growth, firm size, capital structure. May 09, 2019 view 3a1 capital structure meaning and factors determining capital structure. Optimal capital structure the ocm can be defined as that capital structure or combination of debt and equity that leads to the maximum value of the firm ocm maximises the value of the company and hence the wealth of its owners and minimise the companys cost of capital. Factors affecting the capital structure in textile and garment listed in indonesia stock exchange. However, determining what factors to use in the process can be difficult this research presents the most common procedures used in the capital budgeting process. The proportion of debt funding is measured by gearing or leverages. Factors affecting capital structure decisions mba lectures. Bahadur institute of management sciences, university of mysore, india available online at. The impact of capital structure on firms performance in.
887 1511 129 562 269 684 1155 1036 293 960 1197 931 962 559 1210 1424 1214 581 1187 1150 1059 781 1440 530 823 1040 498 1222 1057 1302 1380 563 964 769 494 1299 773 1211 513 733 137 1076 871 457 212 1293