Capital Structure Adjustment Towards Optimum Capital Structure In BSE Listed Indian Automobile Industry With Reference To Firm Specific And Macroeconomic Factors
Capital structure study is highly debated aspect in the area of finance from its extreme views. The outcome of debate is pecking order theory, trade off theory, market timing theory and various regression
models, mathematical models. In this paper, trade off theory of capital structure is studied in Indian manufacturing industry with reference to automobile industry. Trade off theory assumes presence of
optimum capital structure and finance manager make tradeoff between benefit and cost of debt financing. Optimum capital structure is unobserved target which is to be estimated with firm specific variables and
multiple regression model. The objective of the research is to compute the gap filled by observed and target leverage by finance manager in single period and to find the factors that impact to target leverage.
The sample of the study is selected from auto companies listed on Bombay Stock Exchange. Capital structure adjustment is estimated with firm specific and macro-economic factors. The study employed
OLS and System GMM technique suggested by Arellono and Bond to capture dynamic capital structure behavior of Indian automobile companies. The study found that capital structure in Indian automobile
companies adjust with the speed of 26.80 % and 42.30% towards optimum capital structure by OLS and system GMM estimation. Findings suggest that model has significant explanatory power, which predict
that sample companies complete the gap between actual and optimum capital structure in 3.73 years and 2.36 years by OLS and system GMM technique respectively. The findings add to existing literature of
capital structure adjustment in developing countries that Indian automobile companies swiftly adjust to towards optimum capital structure.
Keywords: - Optimum capital structure, Dynamic capital structure, Trade off theory , System GMM,