An Empirical Examination of Factors Determining Capital Structure Indian Micro Scale Industries
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SSRG International Journal of Economics and Management Studies (SSRG-IJEMS) – Volume 7 Issue 1 – Jan 2020
An Empirical Examination of Factors
Determining Capital Structure Indian Micro
Scale Industries
Mrs Anantdeep Kaur Maan1
Assistant Professor, University Business School
Maharaja Ranjit Singh Punjab Technical University Bathinda, Punjab, India
Abstract important determinants of capital structure.
The present paper aims to investigate the Azhagaiah and Gavoury (2011) provide evidence that
determinant of capital structure of 40 MSME from the firms prefer to 100% debt financing when they
four different industrial sectors. The research was access to tax deductible interest. Dogra and Gupta
conducted from year 2015 to year 2019. The present (2009) identify the impact of age of firm, size of
empirical study examines the capital structure firm, growth rate on the capital structure of firms.
determinants across all sectors. Panel Data analysis Mazur (2007) recommend in his study that in current
was conducted by devising STATA. Multiple business scenario, the focus has been shifted from
regression analysis has been conducted. The findings trade off theory to pecking order theory
of study depict that size of firm and risk level among These studies have largely examined the
firms have been emerged as the strong determinants determinants of capital structure in case of large
affecting capital structure of firms across all sectors manufacturing companies. MSMEs plays a vital role
under study. Institutional ownership and Asset in emerging economcies like India. Few researchers
structure have been proved the least effective have made an attempt to dive a little deeper into the
determinants of capital structure across firms. The context of understanding the financing of MSME in
present study implies that institutional owners of India. The current research paper makes an attempt to
companies that are highly liquid, paying high explore the influential factors affecting capital
dividends and fall under high tax brackets do not rely structure decisions of MSMEs in India. The present
on debt financing. research acts as a guiding tool into the issues related
to MSME financing in India. It examines the
Keywords - Capital Structure, MSME, Panel Data, important factors that influence the capital structure
STATA decisions of Indian MSMEs.
I. INTRODUCTION II. MICRO SMALL MEDIUM ENTERPRISE
Investment decision is one of the most (MSMEs) IN INDIA
crucial decisions for the firms as it involves the
wealth of shareholders. An investment is a New ideas and approaches are necessary to
commitment of funds made in the expectation of keep business enterprises in dynamic and buoyant
some positive rate of return. The growth and condition. MSMEs act as a backbone in the economic
profitability of firm largely depends upon the return and industrial development of developing economies.
from the investment and risk appetite of firm. A firm Garg and Walia (2012) supports the fact that the
may use borrowed funds or owners’ funds to make catalytic growth of MSMEs have been emerged as
such investments. Thus capital structure has always major contributor to gross domestic product (GDP),
been an important and challenging decision for the employment and exports in Indian economy using the
management of firm. Capital structure decisions OLS technique. The Sector consisting of 36 million
mainly involve determining the right mix of debt and units, as of today, provides employment to over 80
equity so as to maximize the market value of the million persons. The Sector through more than 6,000
firm and minimize the cost of the capital for products contributes about 8% to GDP besides 45%
maximizing the wealth of the shareholders which to the total manufacturing output and 40% to the
is the major objective of the firm. Yusuf et al (2015) exports from the country. Bodla (2004) concluded
observe that asset structure, liquidity and firm value that MSMEs are no way less than their counterpart
has significant influence in determining the capital large scale industries in so far as the utilization of
structure of firm. Ma, J. H. (2015) analyze that resources is concerned. The Micro, Small and
profitability, debt paying ability and enterprise scale Medium Enterprises Development Act, 2006, lays
has significant impact upon the capital structure of down following categories for various enterprises:
firm. Hoque et al (2014) reveals that financial risk,
profitability, liquidity, operating risk are the
ISSN: 2393 - 9125 www.internationaljournalssrg.org Page 182SSRG International Journal of Economics and Management Studies (SSRG-IJEMS) – Volume 7 Issue 1 – Jan 2020
Term Debt Ratio variables been used as proxy for
leverage.
Descriptions Manufacturing Service
Total Debt ratio =
Industries Industries
The impact of independent variables has been studied
(in Indian ₹) (In Indian on above variable.
₹)
Micro Upto 25 Lakh Upto 10 Independent Variables
Enterprises Lakh In the present research, six factors have been
Small Above 25 Lakh Above 10 considered as independent variables. The following
Enterprises and Up to Lakh and variables have been used as proxy for these six
5 Crores Up to factors in present research
2 Crores
Medium Above 5 Crores Above 2 Profitability
Enterprises and Up to Crores and In the present research, return on Equity has
10 Crores Up to been used as a proxy for profitability to examine the
5 Crores relationship between profitability and leverage.
Source - Ministry of Micro, Small and Medium Return on Equity =
Enterprises (MSME’s)
Firm Size (FS)
Size of firm plays a crucial role in capital
MSMEs play a dominant role in providing
structure of firm. The present research posits the
large employment opportunities at comparatively
existence of relationship between firm size and
lower capital cost than large industries but also help
capital structure (leverage) of a firm.
in industrialization of rural & backward areas,
Firm size = log (Total Sales)
reducing regional imbalances, assuring more
Asset Structure (AS)
equitable distribution of national income and wealth.
Capital structure and asset structure are
MSMEs are complementary to large industries as
significantly associated. Hall et al., (2004) examined
ancillary units and this sector contributes enormously
a negative relationship between short term debt and
to the socio-economic development of the country.
asset structure.
III. DATA AND RESEARCH METHODOLOGY
Firm Risk (FR)
A. Data Risk associated to a firm significantly
In the present research, an attempt has been affects the capital structure of firm. Higher is the
made to examine the capital structure decisions of business risk associated to firm, the more it becomes
non-financial MSMEs in India. The period of tough for the companies to raise funds from the
research study is six years from January 1, 2015 to market. The current research posits the existence of
December 31, 2019. MSMEs from four economic relationship between risk and capital structure of firm
sectors (Pharmaceutical, IT, FMCG and
Infrastructure) have been shortlisted according to the Firm
role of MSMEs in their growth. The necessary data Institutional Ownership ((IO)
of 40 companies (10 companies from each sector) Institutional owners prefers to lower debt
related to research has been extracted. financing in the firm as increase in debt financing
increases the financial risk of firm.
B. Variables
Over the years numerous variables have C. Methodology
been employed by the researchers that may have Panel data regression model has been
probable effect on capital structure of companies. devised to determine factors that influence the capital
The present research study considers the following structure decisions of MSMEs. Regression Models
variables to examine the effect of variables affecting Model 1
capital structure of Micro, Small and Medium TDR = β1ROE + β2FS + β3AS +
enterprises. β4FR + β5IO
Dependent Variables
III. RESULTS
After reviewing the previous research Table 1 provides the descriptive statistics of
studies and on the basis of current business scenario, the variables used in the study. The total debt to
Leverage has been used as dependent variable, a capital employed ratio ranges between 1 per cent to
representative of capital structure of firm. Long 68 per cent with an average of 25 per cent. This
ISSN: 2393 - 9125 www.internationaljournalssrg.org Page 183SSRG International Journal of Economics and Management Studies (SSRG-IJEMS) – Volume 7 Issue 1 – Jan 2020
reveals that the present sample of MSMEs are not 70% overall variation in the Leverage, The model fits
financed mainly through debt. according to r2 appears to be good in majority cases
except FMCG industries.
Table 1: Descriptive Statistics
B. Regression Coefficients
Varia- Std.
bles Maximu Deviat
N Minimum m Mean ion Pharm Aggreg
FMCG Infra IT
ROE 350 0.015 1.457 0.089 0.042 a ate
-
FS 350 6.789 16.738 11.45 0.579 0.338*
TDR 0.1879* -0.267** −0.169 0.456*
AS 350 0.152 0.937 0.685 0.217 *
*
FR 350 0.000 0.249 0.015 0.021 0.382* 0.187*
ROE -0.0272 0.386** -0.0391
IO 350 0.000 0.989 0.675 0.253 * *
0.759* 0.626* 0.375*
FS 0.256** 0.0753*
* * *
A. Hausman Test AS 0.043 0.079** -1.02 -1.16 -0.978
Hausman test is applied in Panel data to 0.0823* 0.396* 0.376* 0.311*
FR 0.395**
examine the appropriate model for the data. * * * *
Null Hypothesis: Random effect model is appropriate IO -0.00420 -1856 -0.003 -4.78 -1.18
Alternative Hypothesis – Fixed effect model is Dummy
appropriate – – – – −0.094
Auto
Dummy −0.96*
Table 2 – Hausman Test – – – –
FMCG *
Dummy −0.549
Test Aggr FMC Infras IT Phar – – – –
Pharma **
statist egate G tructu mace
Dummy −1.524
ics re utical – – – –
s IT **
Chi2 74.86 44.89 38.95 27.94 52.98 Consta
1.93 2.28 0.594 1.657 1.348
P > nt
Chi2 0.000 0.000 0.000 0.000 0.000
Source: Output of regression analysis in STATA
The results in the statistics table indicate that
Note: ** Significant at 1% level of significance; *
p value is 0.000 that leads to rejection of null
Significant at 5% level of significance.
hypothesis. It shows that fixed effect model is more
appropriate model for our research.
Panel data regression results have been
depicted in Table 3. The statistics shows that the firm
Table 3
risk (represented by FR) does not have any
relationship with leverage. This may be so since
Table 3 : Model r2
Indian MSMEs do not rely too much on debt
Industry financing, their firm risk is quite low.
Model Aggr FMC Infra IT Phar
statistic egate G struc mace IV. FINDINGS
s ture utical The statistical results produce the following
s significant findings in the present research.
r2 Within 0.673 0.667 0.710 0.686 0.728
Between 0.708 0.589 0.089 0.747 0.748 Profitability (ROE) is non significant in most of
Overall 0.704 0.686 0.424 0.698 0.496 the industries. Non Significant means there is no
relationship between ROE and capital structure of
F Value 98.42 39.57 52.78 41.78 54.79 firms across the industries. Akdal (2010) supports the
Prob> F 0.000 0.000 0.000 0.000 0.000 present research findings about negative relationship
between profitability and capital structure. The
Source – Output of regression analysis in STATA statistics shows that coefficient of Assets Structure
(AS) and capital structure is non significant in the
Within r2 refers to the observation of present study. It shows that higher proportion of fixed
effects over time within firms; between r2 refers to assets in total assets will lower asymmetric
the observation of effects between firms at any one information problems and should issue more debt.
point in time. The r2 values for the aggregate sample But the present empirical study the pecking order
suggest that all independent variables account for
ISSN: 2393 - 9125 www.internationaljournalssrg.org Page 184SSRG International Journal of Economics and Management Studies (SSRG-IJEMS) – Volume 7 Issue 1 – Jan 2020
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