Effect of determinants on financial leverage in Indian steel industry: A study on capital structure

• Author: Sarada Dakua
• Published date: 01 January 2019
• DOI: http://doi.org/10.1002/ijfe.1671
• Date: 01 January 2019

RESEARCH ARTICLE

Effect of determinants on financial leverage in Indian steel

industry: A study on capital structure

Sarada Dakua

School of Business, University of

Leicester, Leicester, UK

Correspondence

Sarada Dakua, School of Business,

University of Leicester, Leicester, UK.

Email: spd16@student.le.ac.uk

Abstract

Because India is neither a developed country nor its steel companies are finan-

cially self‐sufficient, they are bound to depend on the external capital, resulting

the decision to be taken on the leverage ratio as even more crucial. India being

the top exporter of iron ores has the potential to be counted as one of the top

exporters of steel if the steel companies follow optimal capital structure. Thus,

the leverage ratio needs thorough investigation in order to decide the optimal

capital structure. Although there have been some attempts, they are not exten-

sive. The objective of this study is to empirically investigate the present capital

structure of Indian steel industry from years 2010 until 2017 and the determi-

nants of capital structure and how these determinants correlate with financial

leverage. The research objectives are (1) to identify the significant determinants

that affect the capital structure and (2) to conduct an extensive and empirical

research in order to estimate the correlations of the determinants with the

financial leverage. Seven key determinants have been found: They are profit-

ability, asset structure, size, growth opportunities, non‐debt tax shield, liquid-

ity, and risk. The profitability is found to be highly correlated with the debt

ratio as was expected and reported in previous studies. The correlations among

the determinants such as asset structure, size, and non‐debt tax shield are

statistically significant. Profitability and liquidity carry positive relationship

with debt ratio, although there is a negative relationship between debt ratio

and asset structure.

KEYWORDS

capital structure, determinants, financial leverage, Indian steel industry, statistical analysis

1|INTRODUCTION

The Government of India (GOI) took some major politi-

cal decisions allowing foreign direct investment to reform

the industries in the mid‐90s. The sectors such as con-

struction, housing, transportation, and power generation

then started to grow exponentially, resulting in signifi-

cant increased demand for steel domestically apart from

exports (Dutta & Mukherjee, 2010). Since the journey

has begun, it has faced a lot of hurdles and is now the

second largest producer of crude steel (Ministry of Steel,

Govt. of India, 2017). However, the country has the

potential to be the top exporter of steel if appropriate cap-

ital structure is adopted. This belief is substantiated with

the fact that India is the top exporter of iron ores

(Handoo & Sharma, 2014). Unfortunately, on the other

Received: 19 May 2018 Revised: 9 July 2018 Accepted: 9 September 2018

DOI: 10.1002/ijfe.1671

Int J Fin Econ. 2019;24:427–436. © 2018 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/ijfe 427