Abstract

Capital structure can be defined as the means by which a firm finances its assets. The financing can come from equity, debt or hybrid securities. It is a mix of a company’s long term debt, specific short term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Capital structure is mostly referred to as in terms of debt to equity or debt to assets ratio. Companies manage capital structure through debt or equity issuance, debt or equity repurchases, dividend increases, acquisitions, new investments and risk management.

Capital structure decision is one of the most important decisions that a firm could take because it affects its cost. This paper discusses various parameters which have significant or non significant effect on the capital structure decision of a firm. Further this paper focuses on finding the relation between contribution and significance of the various factors on the leverage ratio and other factors especially for small, medium and small enterprises. This paper also compares the results for micro, small and medium enterprises with BSE 200 companies chosen as proxy. The paper uses data from Prowess database and the annual reports on the performance of the various MSME sector companies. Data for profitability, tangibility, size of the firm, ROA, R&D expense, Advertising and marketing expense, promoter’s shareholding is collected for 525 companies belonging to MSME Sector. It was made sure that only those companies are selected who have been functional in the last 10 years. Similar data was collected for 125 BSE 200 companies who have been functional in the last 10 years, in order to do comparative analysis. For analysis purpose regression analysis was used. The results imply that the factors responsible for making the capital structure decision in BSE 200 companies is different from that used in the micro, small and medium enterprises.