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Determinants of Capital Structure in the Indian Pharma Sector

Author

Listed:
  • April Bhattacharjee

    (Tata Consultancy Services, India)

  • Mihir Dash

    (Alliance University, India)

Abstract

This study analyses the determinants of capital structure in the Indian pharma sector using pooled regression and panel regression modeling. The results of the study suggest that financial leverage in Indian pharma companies is determined primarily by two factors: it is positively related with Non-Debt Tax Shield and negatively related with Profitability. Paradoxically, the former finding supports the Static Trade-Off theory, as companies would prefer debt financing due to its tax benefits, while the latter finding supports the Pecking Order theory, as more profitable companies would prefer internal sources of funds. This could mean that pharma companies would prefer to finance their initial capital expenditure through debt due to its tax advantage, but as they become more profitable they prefer to turn to internal sources. This switch-over behaviour, whereby companies would be expected to switch from financing through debt to retained earnings, should be investigated in further detail, in the pharma sector and in other capital-intensive industries.

Suggested Citation

  • April Bhattacharjee & Mihir Dash, 2018. "Determinants of Capital Structure in the Indian Pharma Sector," Journal of Applied Management and Investments, Department of Business Administration and Corporate Security, International Humanitarian University, vol. 7(3), pages 125-131, September.
    • Handle: RePEc:ods:journl:v:7:y:2018:i:3:p:125-131
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    capital structure; pharma sector; Static Trade-off Theory; Pecking Order Theory;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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