Factors Determinig the Capital Structure of Pharmaceutical Companies in India

Several competing theories have emerged, since Modigliani and Miller's famous propositions on the capital structure, to test the ground realities of capital market imperfections such as taxes, bankruptcy costs, agency costs, and information asymmetries. In practice, capital structure matters, because empirical evidence shows consistent pattern of leverage ratios, both across industries and for individual firms over time. Leverage ratios of specific industries have been documented by many researchers. Therefore, the determinants of the capital structure of companies have been debated for long in corporate finance. This debate has resulted in differing theories on capital structure. However, the debate on the determinants of the capital structure is an ongoing one. In the light of this debate, this paper attempts to test the important determinants of the capital structure of companies. Taking profitability, collateral value of assets, growth, debt service capacity, size, tax rate, non-debt tax shield, liquidity, uniqueness, and business risk as the determinants and the Debt-Equity Ratio (DER) as the dependent variable, multiple regression model is used for the pooled data of pharmaceutical companies in India. The period of study is from 1993 to 2002. The results indicate that the regression is a good fit and the independent variables together determine the capital structure of companies. Further, the results show that profitability, collateral value of assets, growth, size, tax rate and uniqueness do not have significant coefficients and therefore, are not the significant determinants of the capital structure of companies. The coefficients of the variables, debt service capacity, non-debt tax shield, liquidity and business risk are significant and, therefore, these variables are the important determinants of the capital structure of pharamaceutical companies in India.