Macroeconomic Antecedents of Capital Structure Decision-Making

It has been well documented that a firm's capital structure is affected by several factors. The firm-level factors directly enter the capital structure equation to determine the level of leverage and so may be referred to as the determinants. But, the macroeconomic factors do not directly affect the firm's capital structure decision but has an indirect influence on it, and hence, they may be referred as macroeconomic antecedents of capital structure. In the present study, the macroeconomic variables are not sought to be embedded in any structural equation, which seeks to explain capital structure. Instead, the macroeconomic variables are studied independently as trends and characteristics. The macroeconomic antecedents of capital structure when plotted against time on a graph will show as a smooth graph, suggesting deterministic behaviour of these antecedents over time, which is not true. Thus, the impact of these macroeconomic antecedents have been analysed by dividing the time period of the study from 1991 to 2015, on the basis of economic policy changes, into four parts, that is, liberalisation, globalisation, world recovery and crisis period. Annual data have been collected for six macroeconomic variables like GDP, money supply, interest rate and so on. The behaviour of all these macroeconomic antecedents have been analysed by using semi-log regression equation and also taking ‘policy period dummies ’in different form in both intercept and slope, taking liberalisation as base period. The annual compound growth rate of all macroeconomic antecedents was estimated for all policy periods. It was found that for two variables, that is, WPI and USD exchange rate, there was a significant change across all policy periods, while the size of banking market has grown at the same rate across all policy periods. Other macroeconomic antecedents were found to be significant in one or more policy periods. Thus, macroeconomic factors indirectly affect capital structure decisions, although the impact of these antecedents is different in different policy periods and also different for each firm. These macroeconomic antecedents affect the supply side of funds, which in turn affects the capital structure decisions.