A Study on the Factors Influencing the Leverage of Indian Companies

Abstract

The amount of leverage in the firm’s capital structure – the mix of long term debt and equity maintained by the firm – can significantly affect its value by affecting return and risk. Unlike some causes of risk, management has reasonable control over the risk introduced through the use of leverage. Poor capital structure decisions can result in higher expected cost of capital, thereby lowering the net present values of the projects. Capital structure is determined by several financial and non financial factors of a firm. Previous researchers have listed the factors which will influence the leverage decisions. This study examines the influence of growth, profitability, liquidity and dividend policy of a firm on its leverage. The study was conducted by taking 40 Indian companies from four industrial sectors. It was found that all the four independent variables have impact on the capital structure of firms in different industries. The regression analysis revealed that profitability and liquidity are the two major factors which have significant influence on the debt equity ratio of Indian companies.

Keywords: Financial Leverage, Growth, Profitability, Liquidity, Dividend Payout and Operating Spread.

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