Determinants of Capital Structure in Indian Automobile Companies: A Case of Tata Motors

Abstract

Firms use different sources of finance having independent characteristics to finance its operations and to succeed in attaining the ultimate goal of shareholders' value creation. Every decision in business has inevitable connection with finance and cost of finance. Indian financial market has been changing swiftly from bankingdominated to capital market-oriented system. Finance manager has a variety of alternatives at his disposal to raise funds but associated with different cost. The raising of funds may not be a great challenge in a liberalized era but the ultimate objective is efficient use of funds and earning a rate of return over the cost of capital. This will depend upon the capital structure and achieving a judicious mix of debt and equity funds into the capital structure. Improper mix of debt and equity will lead to wealth destruction of the shareholders and optimum capital structure results in wealth creation. This paper has examined the determinants of capital structure in auto industry, particularly in Tata Motors. The period of the study is 12 years: from 2000 to 2011. Seven determinants of capital structure, namely; non-debt tax shields, size of the business, profitability, growth of assets, tangibility, interest coverage ratio and liquidity. It has been observed that non-debt tax shield, size of the business, growth of assets as significant factors in deciding capital structure.