Model of financing decisions: Experiences from the Indian firms

This empirical paper attempts to study the model of financing decisions of Iron, steel, metals & machinery industry, Chemical industry and Food processing & allied industry of the Indian corporate sector. The study is limited to top 84 (41 from Iron, steel, metals & machinery industry, 26 from Chemical industry and 17 from Food processing & allied industry) out of top 500 manufacturing firms selected on the basis of the turnover for the year 2004–2005 which covers the time span of eleven years commencing from 1995–96 to 2005–06. The study reveals that slightly more than half of the companies in each industry (52.76 percent in Iron, steel, metals & machinery industry, 56.44 percent in Chemical industry and 55.74 percent in Food processing & allied industry) are in 0–100 percent capital structure range during the period under study. It means that these companies are using lesser amount of debt capital as compared to their own capital in their capital structure which is below the well-established standard range of 2:1 during the study period. It is found that one-third companies in each industry (31.80 percent in Iron, steel, metals & machinery industry, 31.78 percent in Chemical industry and 32.79 percent in Food processing & allied industry) are in 100–200 percent capital structure range during the period under study. So, it means that these companies are using more amount of debt in their capital structure than their own capital but less than the well-established standard range of 200 percent (2:1) during the study period. It has been observed that 15.44 percent companies in Iron, steel, metals & machinery industry, 11.78 percent companies in Chemical industry and 11.47 percent companies in Food processing & allied industry are lying in more than 200 percent capital structure ranges during the study period. Such companies are using debt beyond the well-established standard range of 200 percent (2:1) during the study period. It is also observed that negligible number of companies in these industries is nearing to the well-established standard range of 200 percent (2:1) during the period under study. Overall, the study reveals that in all the industries, half of the companies are following conservative model, one-third of the companies are following liberal model and rest of the companies are following aggressive model of financing through debt in their capital structure during the study period.