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The Effect of Macroeconomic Variables on the Capital Structure Decisions of Indian Firms: A Vector Error Correction Model/Vector Autoregressive Approach

Author

Listed:
  • Sakshi Khanna

    (Department of Humanities and Social Sciences, Jaypee University of Information Technology, Waknaghat, Solan, Himachal Pradesh, India,)

  • Amit Srivastava

    (Department of Humanities and Social Sciences, Jaypee University of Information Technology, Waknaghat, Solan, Himachal Pradesh, India)

  • Yajulu Medury

    (Bennett Coleman and Co. Ltd., New Delhi, India.)

Abstract

This paper sheds light on how the macroeconomic variables affect the capital structure decisions in context to the equity market timing theory, for the firms of an emerging economy - India. The analysis is done through analytical and causal research design using vector error correction model/vector autoregressive model. Further, the effect is also analyzed when the firms are categorized into the varied sectors of economy - Primary, secondary and tertiary. The period for the study is from the year 1992 to 2013. The results show that changes in macroeconomic environment cause changes in the firm's choice of finance both in long-run as well as in short-run. The analysis shows that for primary sector firms, leverage is pro-cyclical; secondary sector firms imply a counter-cyclical leverage and for tertiary sector firms equity is pro-cyclical. Therefore, the managers must identify the windows of opportunity depending upon the sector to which the firms belong to.

Suggested Citation

  • Sakshi Khanna & Amit Srivastava & Yajulu Medury, 2015. "The Effect of Macroeconomic Variables on the Capital Structure Decisions of Indian Firms: A Vector Error Correction Model/Vector Autoregressive Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 5(4), pages 968-978.
    • Handle: RePEc:eco:journ1:2015-04-16
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    References listed on IDEAS

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    Cited by:

    1. Sakshi Khanna & Amit Srivastava & Yajulu Medury, 2016. "A study of capital structure dynamics on the value of Indian firms using panel threshold regression model," International Journal of Management Practice, Inderscience Enterprises Ltd, vol. 9(1), pages 40-55.

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    More about this item

    Keywords

    Capital Structure Decisions; Equity Market Timing Theory; Vector Error Correction Model/Vector Autoregressive Model; Macroeconomic Variables;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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