1T.A. Pai Management Institute Manipal-576104 (Karnataka)
2Department of Humanities and Social Sciences Indian Institute of Technology Kharagpur-721302
Online published on 17 April, 2012.
The objective of the paper is to find out whether the trade-off and pecking order theories are mutually exclusive or complimentary to each other in determining the optimal capital structure of the Indian manufacturing companies during the period 1993–94 to 2007–08. We find that the trade-off and pecking order theories are complimentary to each other to determine the capital structure and therefore, companies’ financing behavior is best explained by the modified pecking order theory. We also find that Indian manufacturing companies do have target leverage ratios and the adjustment speed towards the target has been around 40 percent.
Trade-off theory, modified pecking order theory, target leverage ratio, adjustment speed
