Title: An Empirical Study on the Determinants
of the Capital Structure of Listed Indian Firms.
 Theory used by the article / research:
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› Trade-off theory, a firm’s optimal debt ratio is
viewed as determined by a trade-off of the cost
and benefit of borrowing, holding the firm’s assets
and investment plan constant.
› The signaling theory based on asymmetric
information problems.
› The agency theory, based on asymmetric
information problem that is principal-agent conflict.
› Pecking order theory, use their retain earning, and
then move to debt when their internal fund run out.
Hypothesis of research: Traditional factors
affect financing decision, namely
profitability, tangibility, taxes and growth.
 Variable use in research:
 Dependent variables:
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› Book leverage
› Market leverage
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Explanatory Variable:
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Non-debt tax shield (NDTS)
Tangibility
Profitability
Business Risk
Growth opportunities
Growth
Size
Agency variables
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Method of analysis: Regression model, used to
analyze the determinants of Indian firms’
capital structure
Result of analysis :
› There has been significant decrease in mean debt-
equity ratio in post liberalization period across the
group and industries.
› Except growth rate and size all other explanatory
variables have significant correlation with leverage
during pre-liberalization period whereas all the
explanatory variables are significantly correlated with
leverage during post-liberalization period.
› The estimated coefficient of non-debt tax shield,
cash operating profit, market-to book value ratio are
consistently significant and have predicted sign
across the equations.
› Foreign investors are not adopting high leverage to
discipline management.
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Conclusion:
Measure of traditional factors that
hypothesized to affect financing
decision, namely profitability, tangibility,
taxes and growth are all significant.
Title: Testing trade-off and pecking order
theories financing SMEs
 Topic: Capital Structure Theory
 Theory used by the article / research:

› Trade-off theory, companies seek to obtain
optimum capital structure and weigh up the
advantages and disadvantages of an
additional monetary unit of debt.
› Pecking order theory, use their retain
earning, and then move to debt when their
internal fund run out.
Hypothesis of research:
 Based on trade-off model
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› The effective tax rate is expected to be
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positively related to the debt level.
Non-debt tax shields should be negatively
related to firm debt.
Default risk should be negatively related to the
firm’s debt ratio.
Companies with greater growth opportunities
will have a smaller debt ratio.
There should be a positive relationship between
debt ratio and firm profitability.
The size of the company should be positively
related to the level of debt.
SMEs face significant transaction cost which
keep them far from their target.

Based on pecking order
› The financing deficit of SMEs should be
positively related to the change in the level
of debt.
› Firm debt should be negatively related to
the volume of firm cash flow.
› Firm with few investment opportunities and
high cash flow should have a low level of
debt, while firms with strong growth
prospects and reduced cash flow should
have high debt ratio.
› The age of the company should be
negatively related to its level of debt.

Variable use in research:
› Total debt ratio (D)
› Effective tax rate (ETR)
› Non-debt tax shield (NDTS)
› Default risk (DR)
› Growth opportunities (GO)
› Profitability (ROA)
› Size
› Cash flow (CF)
› CFGO
› AGE
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Method of analysis: Panel data methodology, by
simultaneously combining cross-section and time series
data
Result of analysis :
› Spanish SMEs seem to find the cost of an unbalanced position
less of a burden than the cost of adjusting. Hypothesis 7:
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accepted.
Current Spanish tax regulation does not provide relevant
advantages to SMEs. Hypothesis 2:accepted but Hypothesis 1: is
not
SMEs also prone to having large growth prospects and high debt
ratios, thus making them very sensitive to Myers’ underinvestment
problem. Hypothesis 4: accepted.
Firm size and leverage are found to be positively connected.
Hypothesis 6: accepted.
All Hypothesis 9, 10,11 are found to be overwhelmingly
confirmed. As expected, cash flow is negatively related to firm
leverage; so the SMEs that generate the most internal resources
are the least levered. The result consistent with pecking theory
prediction.
A positive and significant relationship between the interactive
variable CFGO and firm leverage is obtained. Hypothesis 10 is
fulfilling.
Older SMEs may have generated sufficient internal resources to
not depend as much on debt as younger SMEs, whose
dependence on external resources will be greater.

Conclusion:
› Regarding the trade-off theory, results clearly
indicate that SMEs face high transaction costs
which are probably derived from typical agency
problems and financial restriction in capital
markets.
› Empirical evidence confirms that internal
resources represent the main source of financing
for SMEs.
› Empirical evidence prove that NDTS, growth
opportunities and internal resource play an
important role in the decision making process.
› SME and large firms display significantly distinct
financial behavior, thus confirming the
presumable financial restriction of SMEs.