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Determinants of Capital Structure of Indian Manufacturing Firms: A Hierarchical Linear Modelling Approach

In this paper, the influences of five time-specific or country-specific determinants (namely, inflation, growth in real gross domestic product, stock market development, debt market development and lending interest rate), seven firm-specific determinants (namely, size, tangibility, non-debt tax shield, profitability, growth opportunities, distance from bankruptcy, and liquidity) and three industry-specific determinants (namely, munificence, dynamism and con-centration) of capital structure on leverage ( market- and book-debt ratios) are analysed through the application of Hierarchical Linear Modelling (HLM) technique with maximum likelihood estimation procedure (composed of three hierarchical levels, namely, time, firm and industry, and considering analyses of variance decomposition, random intercept models and random coefficient models), based on a balanced panel data sample of 601 manufacturing firms (belonging to 11 broad industrial divisions) listed on the Bombay Stock Exchange over a period of 18 years from 1997-98 to 2014-15. Though, time- and firm-levels explain about 92.4% and 95.9% of variance of market leverage and book leverage respectively, the importance of industry-level cannot be totally ignored. Apart from the traditional firm-specific determinants, macro-economic and institutional factors (such as, inflation, growth in gross domestic product, stock market development, debt market development, and lending interest rate) and industry-specific variables (such as, munificence and concentration) are expected to be significant determining factors of leverage, based on the prescriptions of the various competing theories of capital structure, in the Indian context.