Non-linearity in the determinants of capital structure: Evidence from Selected Indian pharmaceutical companies

Abstract

This paper examines the impact of eight firm - specific determinants of corporate capital structure or financial leverage - firm size, tangibility, growth opportunities, profitability, non - debt tax shields, operating risk, liquidity and firm age - over the entire conditional distribution of leverage through the application of quantile regression methodology on a balanced panel data related to a selected sample of 76 Indian pharmaceutical companies listed on the Bombay Stock Exchange over a period of 10 years from 2002-03 to 2011-12. The coefficients of the explanatory variables are estimated at five quantiles, namely, 5th, 25th, 50th, 75th and 95th. The empirical results indicate marked non-linearities in the relationships between leverage and its firm-specific determinants with the estimated regression coefficients of the explanatory variables changing magnitudes and statistical significance accompanied by change of signs (in some cases) at different quantiles. This study, though limited to a particular industry, is primarily an attempt to affirm the existence of non-linearities in capital structure determinants of corporate firms in the Indian scenario.