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89
Chapter IV
CHAPTER IV
90
Chapter IV
PART I
ANALYSIS OF CAPITAL STRUCTURE OF SELECTED FIRMS: FIRM SIZEWISE, INCOME SIZE-WISE, AND SECTOR-WISE APPROACHES
IV.1 Introduction
The analysis aims at exploring the nature of impact of profit before
interest taxes and depreciation (PBITD) on various constituents of CS in food
industry in India. The CS constitutes internal funds (equity capital), and external
funds (debt capital). The external funds have been classified as short term debt
(STD), long term debt (LTD), and total debt (TD) which is the sum of STD and
LTD. This part of the study is considered to be the base for the main analysis,
which focuses at revealing the nature of relation between P and LEV.
IV.2 Objectives of Part I
To study the nature of relation between PBITD and different constituents
of CS.
To analyse if size measured in terms of average sales and average income
(PBITD) influences the relation between PBITD and CS.
To analyse the inter-sector influence on the relation between PBITD and
CS.
IV.3 Hypotheses Development
A preliminary analysis is carried out to study the influence of profit
earned on different constituent of CS (internal funds viz., equity capital and
external funds viz., short term debt (STD), long term debt (LTD), and total debt
(TD) which is the sum of STD and LTD), which is considered as the base for the
core analysis, which focuses at revealing the nature of relation between P and
LEV. The impact of sales size, income size and sectoral differences are also
studied.
Ho1 = There is no significant relationship between profit earned and the size of
91
Chapter IV
Ho4 = There is no significant relationship between profit earned and the size of
CS
92
Chapter IV
PBITD
150
Equity shares
100
50
Sep-08
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
Sep-05
Mar-05
Sep-04
Mar-04
Sep-03
Mar-03
Sep-02
Mar-02
Sep-01
Mar-01
Sep-00
Mar-00
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The overall correlation matrix (see table IV.1) gives a better picture about
the relationship between PBITD and the various constituents of CS. There exists
a significant positive correlation (at 1% level) between PBITD and various
constituents of CS (i.e., equity, STD, LTD, and TD).
To test whether PBITD is a good predictor of the various constituents of
CS simple regression (see table IV.2) has been run.
Table IV.1
Overall Correlation Matrix of Food Industry in India
Variables EQUITY
EQUITY
1
STD
LTD
TD
PBITD
.578
(.00)
.304
(.00)
.495
(.00)
.813
(.00)
STD
LTD
TD
PBITD
1
.723
(.00)
.947
(.00)
.776
(.00)
1
.906
(.00)
.490
(.00)
1
.702
(.00)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
93
Chapter IV
PBITD has significant positive coefficients (at 1% level) with the various
constituents of CS (viz., equity, STD, LTD, and TD), which shows that the profit
earned by the firms has significant impact on determining the size of insiders as
well as outsiders funds in their CS. The Adj-R2 value is above 50% for STD and
equity, indicating that the model fit is good and PBITD is a better predictor of
STD and equity than that of the LTD and TD. The F-stat value is also significant
(at 1% level) for TD, LTD, STD, and equity indicating that the model fit is
significant. However, a closer view into the issue will give a better idea about the
impact of PBITD on insiders fund and outsiders fund. For the purpose, the
selected firms are classified using three control variables viz., the sales size-wise,
income size-wise and sector-wise.
IV.6 Sales Size- wise Analysis of Relation between PBITD and Various
Constituents of CS
Kester (1986)13 stated that there are no significant country differences in
LEV between U.S. and Japanese manufacturing firms after controlling for
characteristics such as growth, P, risk, size and industry classification. Rajan and
Zingales (1995)14 emphasized that the negative influence of P on LEV should
become stronger as firm size increases. Booth Collins et al. (2001)15, Panday
(2002)16, and Chen and Zhao (2004) 17also suggested that debt capital decreases
with higher P and SIZ in developing countries.
To study the impact of size the selected sample firms are grouped into
three size categories based on the quantum of sales. The firms with sales upto
Rs.100 crore are grouped as small size firms; the firms with sales above Rs.100
crore but upto Rs.500 crore are grouped as medium size firms; and firms with
94
Chapter IV
above Rs.500 crore are taken as large size firms, considering the average sales
over a period of 10 years as base for this purpose.
95
Chapter IV
Table IV.2
Regression on Total Debt, Long Term Debt, and Short Term Debt of Food Industry in
India (Overall)
Variables
TOTAL DEBT
(Constant)
PBITD
F value
R2
Adjusted R2
59.371
2.687
22.264
.297
(Constant)
PBITD
F value
R2
Adjusted R2
49.242
.871
12.674
.169
(Constant)
PBITD
F value
R2
Adjusted R2
10.265
1.816
12.042
.161
EQUITY
.702
.490
.776
Sig.
2.667
.00
9.038
.00
81.688** (.00)
0.493
0.487
3.885
.00
5.148
.00
26.505** (.00)
0.24
0.23
.852
.39
11.292
.00
127.498** (.00)
0.603
0.598
(Constant)
8.316
.933
8.909
.00
PBITD
.160
.012
.813
12.802
.00
F value
168.893** (.00)
2
R
0.661
2
Adjusted R
0.657
Source: Computed results based on compiled data collected from CMIE prowess
Pvt. Ltd.
**.Significant at 0.01 level;*.Significant at 0.05 level
The trend line of small size firms, medium size and large size firms shows
(see chart IV. B) that the small size firms maintain relatively the same level of
PBITD over the years of study. There is not much of fluctuation in the PBITD of
small size firms, whereas, the trend line of medium size firms shows that there is
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
96
Chapter IV
a slight fall and rise in their PBITD, despite the fact that they could maintain
PBITD without much of flux. On the other hand, the large size firms PBITD
shows a precipitous rise after the year 2004-05.
Chart IV.B
Comparison of Trend line showing PBITD of Small Size, Medium Size, and
Large Size Firms
350
300
250
200
150
100
50
0
Source: Computed results based on compiled data collected from CMIE prowess
Pvt. Ltd.
The trend line showing TD of small size, medium size, and large size
firms exemplify (see chart IV. C) that the TD of small size firms has ascended
during the last few years of the period under study although their PBITD does
not show any such rise, while the medium size firms show that they have
endeavoured to increase their external borrowing over the years. In contrast, the
large size firms, which have steep rise in PBITD, also show steep rise upto the
year 2007-08 and a slight decrease in their external borrowing in the year 200708 although there is no fall in their PBITD in the year 2008-09.
97
Chapter IV
Chart IV.C
Comparison of Trend Line Showing Total Debt of Small Size, Medium Size
Firms, and Large Size Firms
1400
1200
1000
800
SMALL SIZE FIRMS
600
400
200
0
Source: Computed results based on compiled data collected from CMIE prowess
Pvt. Ltd.
EQUITY
.427**
(.00)
.137
(.37)
.218
(.16)
.293
(.06)
STD
LTD
TD
PBITD
1
.780**
(.00)
.864**
(.00)
.495**
(.00)
1
.988**
(.00)
.344*
(.02)
1
.374*
(.014)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
**. Correlation is significant at 0.01 level (2-tailed).
*. Correlation is significant at 0.05 level (2-tailed).
Figures in parentheses denote p value.
98
Chapter IV
The correlation matrix of small size firms (see table IV.3) shows that
PBITD has significant positive correlation (at 1% level) with STD (0.50) and (at
5% level) with LTD (0.34) and TD (0.37). There is no significant correlation
between PBITD and equity in case of small size firms. The regression result (see
table IV.4) shows that PBITD has significant positive coefficients with STD (at
1% level) and TD and LTD (at 5 % level). However, the model fit is not good in
all the cases, indicating that there are other variables predicting the constituents
of CS in small size firms.
Table IV.4
Regression Results on Total Debt, Long Term Debt, and Short Term Debt of Food
Industry in India (Small Size Firms)
Standardized
Variables
Unstandardized Coefficients Coefficients
B
Std. Error
Beta
t
Sig.
TOTAL DEBT
(Constant)
PBITD
F value
R2
Adjusted R2
20.320
4.764
9.805
1.847
(Constant)
PBITD
F value
R2
Adjusted R2
13.522
3.551
8.044
1.515
(Constant)
PBITD
F value
R2
Adjusted R2
6.224
1.522
2.216
.417
(Constant)
PBITD
F value
R2
Adjusted R2
7.553
.483
1.310
.247
EQUITY
.374
2.073
2.579
.04
.014
6.654* (.014)
0.140
0.119
.344
1.681
2.343
.10
.02
5.491* (.02)
0.118
0.097
.495
2.808
3.645
.00
.00
13.283** (.00)
0.245
0.226
.293
5.767
1.959
.00
.057
3.838 (.057)
0.086
0.063
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
**.Significant at 0.01 level;*.Significant at 0.05 level
99
Chapter IV
EQUITY
EQUITY
STD
LTD
TD
PBITD
.467
(.00)
.551
(.00)
.584
(.00)
.349
(.05)
STD
LTD
TD
PBITD
1
.513
(.00)
.681
(.00)
.670
(.00)
1
.978
(.00)
.726
(.00)
1
.782
(.00)
100
Chapter IV
Table IV.6
Regression Results on Total Debt, Long Term Debt, and Short Term Debt of
Food Industry in India (Medium Size Firms)
Variables
Unstandardized Coefficients
B
TOTAL DEBT
Std. Error
(Constant)
PBITD
F value
R2
Adjusted R2
43.095
3.832
16.684
.567
(Constant)
PBITD
F value
R2
Adjusted R2
24.688
3.032
15.712
.534
(Constant)
PBITD
F value
R2
Adjusted R2
18.407
.800
4.841
.164
(Constant)
PBITD
F value
R2
Adjusted R2
9.083
.116
1.696
.058
EQUITY
Standardized
Coefficients
Beta
.782
.726
.670
.349
Sig.
2.583
.015
6.760
.00
45.702** (.00)
0.612
0.598
1.571
.12
5.680
.00
32.266** (.00)
0.527
0.510
3.802
.00
4.862
.00
23.644** (.00)
0.449
0.430
5.355
2.005
.00
.054
4.020 (.054)
0.122
0.091
101
Chapter IV
EQUITY
STD
LTD
TD
PBITD
1
.384
(.22)
-.152
(.64)
.179
(.58)
.868**
(.00)
1
.706*
(.01)
.950**
(.00)
.601*
(.04)
1
.891**
(.00)
.154
(.63)
1
.452
(.14)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
102
Chapter IV
Table IV.8
Regression Results on Total Debt, Long Term Debt, and Short Term Debt of
Food Industry in India (Large Size Firms)
Variables
TOTAL DEBT
(Constant)
PBITD
F value
R2
Adjusted R2
294.277
1.750
212.355
1.092
(Constant)
PBITD
F value
R2
Adjusted R2
185.129
.262
103.292
.531
(Constant)
PBITD
F value
R2
Adjusted R2
109.148
1.488
121.890
.627
(Constant)
PBITD
F value
R2
Adjusted R2
8.011
.162
5.674
.029
EQUITY
Sig.
.452
1.386
1.603
.19
.14
2.571 (.14)
0.205
0.125
.154
1.792
.493
.10
.63
.243 (.63)
0.024
-0.074
.601
.895
2.375
.39
.03
5.643* (.03)
0.361
0.297
.868
1.412
.18
5.540
.00
30.695** (.00)
0.754
0.730
Source: Computed results based on compiled data collected from CMIE prowess
Pvt. Ltd.
**Significant at 0.01 level;*Significant at 0.05 level
103
Chapter IV
IV.7 Income Size- wise Analysis of Relation between PBITD and Various
Constituents of CS
Income earned is used as another control variable to get a better picture
about the impact of PBITD on the different constituents of CS. The firms within
the same income range are grouped together to analyse the impact of PBITD.
The firms are grouped into three sub-categories viz. low income size firms with
profit (PBITD) < Rs.10 crore; medium income size firms with profit > Rs.10
crore but < Rs.50 crore; high income size firms with income >Rs.50 crore. The
average income (PBITD) for the period of 10 years is considered as base for this
purpose.
The trend line of low income size firms shows (see chart IV. D) no
extraordinary rise or fall in their PBITD over the study period. While, the
medium income size firms show a gradual rise in PBITD the large income size
firms could put forth a steep rise in their PBITD. Thus, the results closely
correspond with that of the trend line of small size, medium size, and large size
firms based on its sales size.
Chart IV.D
Comparison of Trend line showing PBITD of Low Income Size, Medium Income
Size, and High Income Size Firms
450
400
350
300
250
200
150
100
50
Source: Computed results based on compiled data collected from CMIE prowess
Pvt. Ltd.
104
Chapter IV
Chart IV.E
Comparison of Trend line showing Total Debt of Low Income Size, Medium
Income Size, and High Income Size Firms
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
Source: Computed results based on compiled data collected from CMIE prowess
Pvt. Ltd.
The trend line showing TD of low income size firms shows (see chart IV.
E) that they maintain the same level of external borrowings over the study period
since, they sustain their PBITD at the same level without much enhancement.
The medium income size firms, however, maintain their borrowing level closer to
that of low income size firms although their PBITD shows an increase from the
year 2004-05. The TD of high income size firms shows that, as their PBITD rises,
they have also endeavoured to increase their TD to exploit opportunities
although there is a slight fall in TD in the year 2008-09.
IV.7.1 Correlation Co-efficient and Regression Results of Constituents of CS of
Low Income Size Firms
The correlation matrix of low income size firms (see table IV.9) shows
that there exists a highly significant correlation between PBITD and equity (0.52)
as well as between PBITD and STD (0.45) (at 1% level). The regression results
(see table IV.10) show that PBITD of low income size firms has significant
coefficient with STD, as well as with equity (at 1% level). However, the model fit
with regard to all constituents of CS viz., STD, LTD, TD and equity is not good
as the Adj- R2 value remains below 50% (i.e., 0.18, -0.01, 0.02, and 0.26
respectively), which fact shows that the PBITD has a very little role in
determining the level of STD, LTD, TD and equity in case of low income size
firms.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
105
Chapter IV
Table IV.9
Correlation Matrix of Constituents of CS of Low Income Size Firms of Food
Industry in India
Variables EQUITY
EQUITY
1
STD
.384
(.00)
.173
(.21)
.236
(.09)
.522
(.00)
LTD
TD
PBITD
STD
LTD
TD
PBITD
1
.717
(.00)
.829
(.00)
.447
(.00)
1
.984
(.00)
.095
(.49)
1
.190
(.17)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Table IV.10
Regression Results on Total Debt, Long Term Debt, and Short Term Debt of
Food Industry in India (Low Income Size Firms)
Variables
Unstandardized Coefficients
TOTAL DEBT
Std. Error
(Constant)
PBITD
F 2value
R
Adjusted R2
26.204
3.545
9.476
2.542
(Constant)
PBITD
F 2value
R
Adjusted R2
19.570
1.426
(Constant)
PBITD
F 2value
R
Adjusted R2
(Constant)
PBITD
F 2value
R
Adjusted R2
EQUITY
Standardized
Coefficients
Beta
Sig.
.190
2.765
1.394
.00
.16
1.944 (.16)
0.063
0.018
7.706
2.067
.095
2.540
.690
.014
.49
.476 (.49)
0.009
-0.010
6.633
2.119
2.194
.589
.447
5.542
1.302
1.101
.295
.522
3.023
.00
3.600
.00
12.957** (.00)
0.199
0.184
5.032
.00
4.408
.00
19.429** (.00)
0.272
0.258
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
**.Significant at 0.01 level;*.Significant at 0.05 level
106
Chapter IV
EQUITY
.280
(.20)
.390
(.07)
.484
(.02)
.319
(.14)
STD
LTD
TD
PBITD
1
.045
(.84)
.438
(.04)
.072
(.75)
1
.916
(.00)
.828
(.00)
1
.773
(.00)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
107
Chapter IV
Table IV.12
Regression Results on Total Debt, Long Term Debt, and Short Term Debt of
Food Industry in India (Medium Income Size Firms)
Variables
TOTAL DEBT
(Constant)
PBITD
F 2value
R
Adjusted R2
-10.656
7.054
36.363
1.296
.773
(Constant)
PBITD
F 2value
R
Adjusted R2
-58.555
6.725
28.616
1.020
.828
(Constant)
PBITD
F 2value
R
Adjusted R2
49.006
.268
23.197
.827
(Constant)
PBITD
F 2value
R
Adjusted R2
7.774
.237
4.428
.158
EQUITY
Sig.
-.293
.77
5.442
.00
29.620**(.00)
0.59
0.57
-2.046
.05
6.593
.00
43.469** (.00)
0.685
0.669
.072
2.113
.324
.04
.74
.105 (.74)
0.005
-0.045
.319
1.756
1.504
.09
.14
2.261 (.14)
0.102
0.057
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
**.Significant at 0.01 level;*.Significant at 0.05 level
Table IV.13
Correlation Matrix of Constituents of CS of High Income Size Firms of Food
Industry in India
Variables
EQUITY
STD
LTD
TD
PBITD
EQUITY
.376
(.28)
-.257
(.47)
.137
(.71)
.893
(.00)
STD
LTD
TD
PBITD
1
.667
(.04)
.947
(.00)
.557
(.10)
1
.871
(.00)
-.037
(.92)
1
.351
(.32)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
**. Correlation is significant at 0.01 level (2-tailed).
*. Correlation is significant at 0.05 level (2-tailed).
Figures in parentheses denote p value.
108
Chapter IV
Table IV.14
Regression Results on Total Debt, Long Term Debt, and Short Term Debt of
Food Industry in India (High Income Size Firms)
Unstandardized Coefficients Standardized
Coefficients
Variables
B
Std. Error
Beta
t
Sig.
TOTAL DEBT
(Constant)
PBITD
F 2value
R
Adjusted R2
332.989
1.560
316.978
1.471
.351
1.051
1.060
.32
.32
1.124(.32)
0.123
0.014
(Constant)
PBITD
F 2value
R
Adjusted R2
272.486
-.070
146.054
.678
-.037
1.866
-.103
.09
.92
.011 (.92)
0.001
-0.124
(Constant)
PBITD
F 2value
R
Adjusted R2
60.503
1.630
185.308
.860
.557
.327
1.895
.75
.09
3.592 (.09)
0.310
0.224
(Constant)
PBITD
F 2value
R
Adjusted R2
-1.551
.195
7.477
.035
EQUITY
.893
-.207
.84
5.604
.00
31.410** (.00)
0.797
0.772
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
**.Significant at 0.01 level;*.Significant at 0.05 level
109
Chapter IV
Since there is more number of sectors with firms of few in numbers, the
firms are combined and grouped into three sectors constituting related firms;
thereby the firms are classified into three sectors viz., Sector I, Sector II and
Sector III. Sector I constitutes 32 vegetable oil firms; Sector II constitutes 30
firms which include 9 firms of tea sector, 11 firms of dairy sector, and 10 firms of
sugar sector; Sector III constitutes 24 firms comprising of miscellaneous sectors,
which include coffee (1), cocoa products & confectionery (1), processed
/packaged foods (1), starches (2), marine food (3), poultry & meat product (1),
floriculture (2), milling products ( 3), and other agricultural products (10).
The trend line shows (see chart IV. F) that firms of sector III earn lowest
PBITD and of sector II earn highest PBITD, while PBITD of firms of sector I lies
between these two sectors. The PBITD of sector III shows a gradual rise after a
slight fall in the year 2001-02 without much of flux. The trend line of sector I
firms follow closely the line of sector III firms until 2005-06 and experienced a
steep increase thereafter, although there is a small fall in the year 2008-09, while
on the contrary, the PBITD of sector II has grown gradually upto the year 200607 followed by a slight fall in the year 2007-08 and a very steep increase in the
year 2008-09. However, all the sectors show a gradual increase in their PBITD
without much of fluctuations.
Chart IV.F
Comparison of Trend Line showing PBITD of Firms of Sector I, Sector II and
Sector III
120
100
80
60
SECTOR I
40
SECTOR II
20
SECTOR III
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
110
Chapter IV
SECTOR I
SECTOR II
SECTOR III
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
EQUITY
.467
(.01)
.448
(.010)
.464
(.01)
.669
(.00)
STD
LTD
TD
PBITD
1
.952
(.00)
.992
(.00)
.872
(.00)
1
.983
(.00)
.893
(.00)
1
.891
(.00)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
111
Chapter IV
The correlation matrix of sector I (see table IV.15) shows that there exists
a highly significant correlation between PBITD and LTD (0.89), STD (0.87), TD
(0.89), and equity (0.67). The regression results (see table IV.16) also show that
the PBITD of firms under sector I has significant coefficient with LTD (3.19),
STD (4.53), TD (7.72), and equity (0.13) (at 1% level). The Adj-R2 value is above
70% for the models with dependent variables LTD (0.79), STD (0.75), and TD
(0.79), which indicates that PBITD is a very good predictor of the size of external
funds of firms belonging to the sector I.
Table IV.16
Regression Results on Total Debt, Long Term Debt, and Short Term Debt of
Food Industry in India (Sector I)
Unstandardized Coefficients Standardized
Coefficients
Variables
B
Std. Error
Beta
t
Sig.
TOTAL DEBT
(Constant)
PBITD
F value
R2
Adjusted R2
-7.784
7.720
32.736
.719
(Constant)
PBITD
F value
R2
Adjusted R2
7.118
3.194
13.407
.294
(Constant)
PBITD
F value
R2
Adjusted R2
-14.903
4.526
21.106
.464
(Constant)
PBITD
F value
R2
Adjusted R2
6.751
.134
1.236
.027
EQUITY
.891
.893
-.238
10.736
.81
.00
115.254**(.00)
0.793
0.787
.531
.59
10.844
.00
117.596** (.00)
0.797
0.790
.872
-.706
9.763
.48
.00
95.317** (.00)
0.761
0.753
.669
5.461
4.934
.00
.00
24.349** (.00)
0.448
0.430
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
**Significant at 0.01 level;*Significant at 0.05 level
112
Chapter IV
EQUITY
STD
LTD
TD
PBITD
1
.841
(.00)
.179
(.34)
.674
(.00)
.842
(.00)
1
.367
(.05)
.880
(.00)
.974
(.00)
1
.765
(.00)
.339
(.07)
1
.847
(.00)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
**. Correlation is significant at 0.01 level (2-tailed).
*. Correlation is significant at 0.05 level (2-tailed).
Figures in parentheses denote p value.
113
Chapter IV
high with regard to STD (0.68), LTD (0.69), TD (0.71), indicating the fitness of
the model in these cases. Thus, PBITD is a good predictor of external funds for
firms belonging to sector III.
Table IV.18
Regression Results on Total Debt, Long Term Debt, and Short Term Debt of
Food Industry in India (Sector II)
Variables
TOTAL DEBT
(Constant)
PBITD
F value
R2
Adjusted R2
100.772
1.775
24.412
.210
(Constant)
PBITD
F value
R2
Adjusted R2
81.670
.363
22.123
.191
(Constant)
PBITD
F value
R2
Adjusted R2
19.539
1.411
7.195
.062
(Constant)
PBITD
F value
R2
Adjusted R2
11.245
.155
2.181
.019
.847
4.128
.00
8.435
.00
71.153**(.00)
0.718
0.708
3.692
1.904
EQUITY
.842
Sig.
.00
.06
3.626 (.06)
0.115
0.083
2.716
.01
22.750
.00
517.552** (.00)
0.949
0.947
5.157
.00
8.256
.00
68.154** (.00)
0.709
0.698
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
**Significant at 0.01 level;*Significant at 0.05 level
114
Chapter IV
Table IV.19
Table IV.20
Regression Results on Total Debt, Long Term Debt, and Short Term Debt of
Food Industry in India (Sector III)
Variables
Unstandardized Coefficients
TOTAL DEBT
Std. Error
Standardized
Coefficients
Beta
(Constant)
PBITD
F 2value
R
Adjusted R2
7.600
4.577
13.711
.606
.850
(Constant)
PBITD
F 2value
R
Adjusted R2
4.574
3.893
12.225
.540
.838
(Constant)
PBITD
F 2value
R
Adjusted R2
3.026
.684
2.187
.097
.834
(Constant)
PBITD
F 2value
R
Adjusted R2
7.840
.147
1.234
.055
.498
EQUITY
t
.554
7.554
Sig.
.58
.00
57.064**(.00)
0.722
0.709
.374
.71
7.206
.00
51.932** (.00)
0.702
0.689
1.384
.18
7.077
.00
50.084** (.00)
0.695
0.681
6.355
2.690
.00
.01
7.236* (.01)
0.248
0.213
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
**Significant at 0.01 level;*Significant at 0.05 level
115
Chapter IV
IV.9 Conclusion
The preliminary study about the relation between PBITD and the various
constituents of CS has put forth some important facts about the Food Industry in
India. The overall analysis shows that PBITD has highly significant positive
correlation with STD, LTD, TD and equity (see table IV.21). However the
regression result suggests that PBITD is a good determinant of STD and equity
where the Adj-R2 value is greater (0.60 for STD and 0.66 for equity). The
peculiar feature about the industry is that as their PBITD increases they rely
more on STD and equity capital rather than availing LTD, which would be easily
available as their profit increases. These firms, thus tend to reduce the risk
involved in fixed interest bearing commitments if they rely on outside capital.
Thus the hypothesis Ho1, Ho2, Ho3 and Ho4 are rejected in case of overall result of
food industry. A closer picture about the relation between PBITD and the
various constituents of CS can be got through categorized study and so the
industry is classified based on the sale size and income size. A sector wise
analysis is also conducted.
Table IV.21
Summary of Overall Results of the Relation between PBITD and the
Constituents of CS
Hypotheses
Ho = There is no
significant relationship
between profit earned
and long term debt
Ho2 = There is no
significant relationship
between profit earned
and short term debt
Ho3 = There is no
significant relationship
between profit earned
and total debt
Ho4 = There is no
significant relationship
between profit earned
and equity
1
Overall Results
Supporting Works
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
116
Chapter IV
Table IV.22
Summary of Sales Size-wise Analysis of the Relation between PBITD and the Constituents
of CS
Hypotheses
Relation between Predictors and Dependent Variables
Small Size Firms Medium Size Firms Large Size Firms
1
Ho = no significant
+ve*
+ve**
relationship between profit
Accepted
Rejected
Rejected
earned and long term debt
Ho2 = no significant
+ve**
+ve**
+ve*
relationship between profit
Rejected
Rejected
Rejected
earned and short term debt
Ho3 = no significant
+ve*
+ve**
Accepted
relationship between profit
Rejected
Rejected
earned and total debt
Ho4 = no significant
+ve**
relationship between profit
Accepted
Accepted
Rejected
earned and equity
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
117
Chapter IV
Therefore, the hypothesis Ho5 that there is no significant impact of size of sales
on the relation between profit earned and the various constituents of capital
structure is rejected.
IV.9.2 Income Size-wise Analysis
hypotheses Ho2, Ho4 are rejected and the hypotheses Ho1, Ho3 are accepted.
However, the Adj-R2 value is too low to support the regression model that
PBITD is a significant determinant of the various constituents of CS. Thus,
similar to the case of small size firms, low income size firms also have other
factors influencing STD, LTD, TD and equity (see table IV.23).
rejected and the hypotheses Ho2, Ho4 are accepted, which fact result is just
contrary to the result of low income firms.
equity capital rather that outside debt. Ho4 is rejected and the Ho1, Ho2, Ho3 are
accepted in case as of high income firms.
Therefore, the hypothesis Ho6 that there is no significant impact of size
of income on the relation between profit earned and the various constituents of
capital structure is rejected.
118
Chapter IV
Table IV.23
Summary of Income Size-wise Analysis of the Relation between PBITD and the
Constituents of CS
Hypotheses
Ho1 = no significant
relationship between profit
earned and long term debt
Ho2 = no significant
relationship between profit
earned and short term debt
Ho3 = no significant
relationship between profit
earned and total debt
Ho4 = no significant
relationship between profit
earned and equity
+ve**
Rejected
Accepted
+ve**
Rejected
Accepted
Accepted
Accepted
+ve**
Rejected
Accepted
+ve**
Rejected
Accepted
+ve**
Rejected
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
119
Chapter IV
Table IV.24
Summary of Sector-wise Analysis of the Relation between PBITD and the
Constituents of CS
Hypotheses
Ho1 = no significant
relationship between profit
earned and long term debt
Ho2 = no significant
relationship between profit
earned and short term debt
Ho3 = no significant
relationship between profit
earned and total debt
Ho4 = no significant
relationship between profit
earned and equity
Accepted
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve*
Rejected
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
sector differences on the relation between profit earned and the various
constituents of capital structure is accepted.
The overall result, thus, shows that PBITD is a major determinant of STD
and equity capital while there are other determinants which also predict the size
of LTD and TD. While PBITD is not a good determinant of any of the
constituents of the CS for small size firms, it explains above 50% of variation in
LTD and TD of medium size firms. PBITD is a major determinant of equity
capital in case of large size firms. The result of small size firms, medium size
firms and large size firms also matches with the results of low income size,
medium income size, and high income size firms respectively although there are
very little variations. Thus, SIZ has significant impact on the relation between P
and LEV as proved by Rajan and Zingales (1995)19, Booth Collins et al. (2001)20.
Hence, Ho5: there is no significant influence of size of sales on the relation
between profit earned and the various constituents of capital structure is
rejected. The hypothesis Ho6: there is no significant influence of size of income
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
120
Chapter IV
on the relation between profit earned and the various constituents of capital
structure is also rejected. Sector I shows that PBITD is the major determinant of
all the constituents of CS (viz., STD, LTD, TD and equity) with a high Adj. R2
value. However, Sector II depends more on STD, TD, and equity as their profit
(PBITD) increases rather than relying on LTD, while PBITD is the major
determinants of external borrowings of firms of Sector III. Therefore, it leads to
infer that sectoral classification has least impact on the relation between profit
earned and the various constituents of capital structure. Hence, Ho7 is accepted
for the reason that, as indicated by the findings of Barton, Hill, and Sundaram
(1989)21, sectoral differences does not have impact on the relation between
PBITD and CS.
The findings show that there is impact of profit earned on various
constituents of CS. The main study profoundly analyses the determinants of LEV
and P in Food Industry in India.
PART II
DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY: FIRM
SIZE- WISE, INCOME SIZE-WISE, AND SECTOR WISE APPROACHES
IV.10 Introduction
India has a large and diverse agriculture background, and is one of the
worlds leading producers of food articles. It is also a major consumer, with an
expanding population to feed. Agriculture and allied sectors accounted for 15.7%
of the GDP in 20091022. High food prices, resulting from the combined effects
of the weak 2009 monsoon and inefficiencies in the government's food
distribution system have shook Indian economy to the core. The expansion of
Food Industry in India would be the right alternate for this. Studies and
researches facilitate the advancement of the industry; hence the study is one step
ahead of all such attempts.
The preliminary analysis of food industry concentrated on finding if the
profit earned has any impact on the constituents of CS. As the results are
positive, an in depth study about the relation between P and LEV is carried out
in part II, which tries to analyze the determinants of LEV and P and also to
study if controlling variables such as sales size, income size and sectoral
classification influence the relation between the determinants and the dependent
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
121
Chapter IV
variables LEV and P. Many theoretical and empirical works have been carried out
to bring out the relation between P and CS. To illustrate a few, Myers (1984)23
introduced pecking order theory, which states an order which large firms follow
to escape the problem of informational asymmetry. Firms prefer internal funds
and when it gets exhausted they look in for debt finance rather than equity
finance. Major US industrial firms follow a financing hierarchy (pecking order)
and the managers consider the projected cash flow from asset to be financed as
the main criteria in governing financing decisions (Pinegar and Wilbricht
1989)24. The works of Titman& Wessels (1988)25, Kester (1986)26, Chang
(2003)27and many others have considered P as one of the determinants of CS.
Wald (1999)28 found that P was the single largest determinant of debt/asset
ratios in cross-sectional tests for the US, UK, Germany, France and Japan
(Myers 2001) 29, which shows how important P is in determining the CS of the
firms. The ability of the firm to earn consistent profit is the deciding factor of a
firms CS. Debt capacity depends on the future P and value of the firm; it may
be able to increase borrowing if it does well, or be forced to pay down debt if it
does poorly (Myers 2001) 30. The works of Myers (1984) 31, Kester (1986) 32,
Friend and Hasbrouch (1988)33, Friend and Lang (1988)34, Titman and Wessels
(1988)35, and Chen and Zhao (2004)36 give empirical evidences in support of the
negative relation between P & LEV. Long and Malitz (1985) 37 revealed that LEV
increases with increases in P but their result was insignificant. Though there are
varied views regarding the type of relation, the works give strong evidence that
there is a binding link between P& CS. Hence, the study is carried out to achieve
the objectives stated in chapter I.
IV.11 Objectives of Part II
The objectives of the study are to analyse the relationship between P and
LEV in general and to analyze the impact of non debt tax shield (NDTXSH),
collateral asset (COLASS), growth rate (GROW), size (SIZ), age (AG) and
volatility (VOL) on LEV in determining the CS of the firm.
The influence of sales size, income size and sectoral differences of firms
on the relationship between P and CS is also intended to be analyzed.
122
Chapter IV
the firms.
Ho = There is no significant relationship between non-debt tax shield and
leverage of the firms.
9
123
Chapter IV
of the firms.
Ho = There is no significant relationship between growth and leverage of the
firms.
12
Ho = There is no significant relationship between volatility and leverage of the
firms.
11
Size influences the earning capacity and eventually the borrowing power
of the firms. The impact of size is studied in the works of Hutchinson and
Michaelas (1998)58, Booth Collins et al. (2001)59, Panday (2002)60, and Chen and
Zhao (2004)61. Therefore, the impact of SIZ of the firms on the relationship
between P and CS should be analyzed. Barton, Hill, and Sundaram (1989)62,
Baker (1973)63, and Lee and Kwok (1988)64 findings suggested that relativity of
business influences LEV. Thus, the hypotheses are:
Ho13= There is no significant influence of size in deviating the relationship
124
Chapter IV
Table IV.25
Ratios of Independent Variables Determining LEV
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
Description
Inference
Short term debt / Book value of equity A high value denotes high leverage in terms
of short term debt and vice versa
Long term debt / Book value of equity A high value denotes high leverage in terms
of long term debt and vice versa
Total debt / Book value of equity
A high value denotes high leverage in terms
of total debt and vice versa
Standard deviation of earnings before A high value denotes greater volatility in
earnings from the assets invested and vice
interest, taxes and depreciation
(EBITD) / Total Assets
versa
Ratio of Property, Plant and
A high value denotes higher share of fixed
asset to total asset, which implies greater
Equipment / Total Assets
share of assets is invested for increasing
earning and vice versa
Ratio of the sum of depreciation and A high value denotes a higher non debt tax
amortization / Total Assets
shield and vice versa
PBITD / Fixed Assets
A high value denotes higher profitability in
terms of fixed assets
Logarithm of Sales over Years
Turnover adjusted for fluctuation over years
Total number of years from the date of The number of years the firm has been
incorporation
carrying out business
Compounded annual growth rate
The growth of total asset over years
(CAGR) of total assets
125
Chapter IV
17.019
16.3
16
14
12
10
9.028
8
6
4
2
11.984
9.348
5.83
6.354
7.452
6.78
9.716
P
LEV_TD
0.23
0.272
0.232
0.395
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
126
Chapter IV
Table IV. 26
Overall Descriptive Statistics of Determinants of LEV of Food Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COL ASS
NDTXSH
P
SIZ
AG
GROW
N
86
86
86
86
86
86
86
86
86
86
Minimum Maximum
.036
41.859
.089
48.860
.186
69.506
.009
.759
.034
.836
-4.890
16.005
-.349
1.389
-.905
3.677
13
53
-.174
.463
Mean
3.899
6.101
9.981
.085
.435
.284
.290
1.819
24.12
.080
Std. Deviation
6.081
8.289
12.790
.115
.185
2.030
.288
.903
10.010
.126
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The correlation matrix shows (see table IV. 27) that there exists a highly
significant (at 1% level) positive correlation between GROW and LEV_STD
(0.343), LEV_LTD (0.54), and LEV_TD (0.51). SIZ also has highly significant
positive correlation with LEV_STD (0.50), LEV_LTD (0.43), and LEV_TD
(0.51). The AG of the industry has highly significant positive correlation with
LEV_STD (0.30), LEV_TD (0.29) and significant correlation (at 5% level) with
LEV_LTD (0.22).
127
Chapter IV
Table IV. 27
Overall Correlation Matrix of Determinants of LEV of Food Industry in India
LEV
LEV LEV
Variables _STD
_LTD _TD VOL COLASS NDTXSH P
LEV_STD
1
(.00)
LEV_LTD .577
1
(.00)
LEV_TD
.849
.921
1
(.00) (.00)
VOL
-.227
1
(.04)
COLASS
-.226
.218
1
(.04)
(.04)
NDTXSH
1
P
SIZ
AG
GROW
.249
(.02)
.503
(.00)
.302
(.01)
.343
(.00)
.427
(.00)
.218
(.04)
.537
(.00)
.241
(.03)
.514
(.00)
.285
(.01)
.509
(.00)
-.299
(.01)
-.348
(.00)
-.478
(.00)
-.455
(.00)
-.246
(.02)
SIZ AG GROW
1
.480
1
(.00)
.237
(.03)
.357 .558
(.00) (.00)
1
1
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
**. Correlation is significant at 0.01 level (2-tailed).
*. Correlation is significant at 0.05 level (2-tailed).
Figures in parentheses denote p value.
The overall regression results show that (see table IV. 28) SIZ (2.65) and
AG (0.13) have highly significant positive coefficients with LEV_STD. The AdjR2 is 0.24, indicating that the predictor variables determine changes in
LEV_STD only to the extent of 20%. However, the F-stat value (4.86) is highly
significant, revealing that the variability in the predictor variables explains a
statistically significant portion of variability in the dependent variable,
LEV_STD. GROW has highly significant positive coefficient with LEV_LTD
(30.20) and LEV_TD (model 1 is 35.21 & model 2 is 35.23). SIZ has significant
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
128
Chapter IV
Source: Computed results based on compiled data collected from CMIE prowess
Pvt. Ltd.
Note: Figures in parentheses are p values;**Significant at 0.01 level;*Significant
at 0.05 level
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
129
Chapter IV
Table IV. 29
KMO and Bartlett's Test of Determinants of LEV of Food Industry in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.585
894.208
45
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Table IV. 30
Overall Factor Analysis of Determinants of LEV of Food Industry in India
Factor
Eigen value
Factor 1
3.893
Factor 2
1.469
Factor 3
1.146
Variable
convergence
LEV_TD
LEV_LTD
LEV_STD
GROW
AG
P
COLASS
SIZ
NDTXSH
VOL
Factor
loadings
.969
.904
.810
.558
.369
.816
-.810
.667
-.809
.566
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
For factor analysis (see table IV. 30), the variables are grouped into three
factors, showing high level of correlation among the variables within the factor.
Factor 1 constitutes LEV_TD, LEV_LTD, LEV_STD, GROW, and AG. Factor
2 constitutes P, COLASS, SIZ, and factor 3 constitutes NDTXSH and VOL.
IV.16 Sales Size-wise Analysis of Determinants of LEV
Many empirical works were attempted to study the impact of SIZ on CS
and P. Rajan and Zingales (1995) 67 pointed out that the negative influence of P
on LEV increases with the size of the firm. Profitable large size firms have
relatively less debt when compared to that of the smaller and riskier firms. Small
size firms tend to use significantly more short term debt than that of the larger
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
130
Chapter IV
firms (Titman and Wessels 1988) 68. A size-wise analysis is carried out to study
the impact of size on the various predictor variables on the dependent variables.
In order to test the same the firms with sales turnover of < Rs.100 crore are
grouped as small size firms, the firms with sales turnover of > Rs.100 crore but
< Rs.500 crore are considered as medium size firms, and firms with sales
turnover of >Rs.500 crore are considered as large size firms.
IV.16.1 Analysis of Small Size Firms
The trend analysis of small size firms shows (see chart IV.I) that there is a
steep rise in LEV_TD after the years 2005-06 till 2007-08, thereafter, there has
been a sudden fall, which matches with the overall trend line due to the impact
of global meltdown in 2007.
Chart IV.I
Trend Line Showing Relation between P and LEV_TD of Small Size Firms
12
10.309
10
8
7.945
6
3.608
4.135
4.301
4
2
0
3.395
3.589
0.1041
0.124
0.135
5.689
4.307
LEV_TD
4.367
0.156
0.148
0.368
0.142
0.133
0.257
0.314
Source: Computed results based on compiled data collected from CMIE prowess
Pvt. Ltd.
Small size firms include 43 firms with average sales turnover < Rs.100
crore. The descriptive statistics shows (see table IV. 31) that the standard
deviation is high among the small size firms with respect to LEV_LTD when
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
131
Chapter IV
N
43
43
43
43
43
43
43
43
43
43
Minimum Maximum
.036
10.217
.089
48.860
.186
57.282
.009
.759
.034
.836
-4.890
16.005
-.278
1.008
-.905
1.945
15
53
-.174
.463
Mean
1.526
3.635
5.164
.113
.478
.420
.194
1.154
22.21
.0137
Std. Deviation
2.382
8.612
1.049
.150
.199
2.851
.258
.768
9.339
.109
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The correlation results (see table IV. 32) show the relation between the
predictor variables and the dependent variables. GROW has highly significant
correlation with the dependent variables LEV_LTD (0.64) and LEV_TD (0.61)
and has significant correlation with LEV_STD (0.38). AG has highly significant
positive correlation with LEV_STD (0.52), LEV_LTD (0.40) and LEV_TD
(0.45). SIZ has significant positive correlation with LEV_STD (0.36), LEV_LTD
(0.32) and LEV_TD (0.34), hence GROW, AG, SIZ influence the size of LEV of
small size firms. P has an insignificant positive relation with LEV while VOL,
COLASS, and NDTXSH have insignificant negative correlation with LEV.
132
Chapter IV
Table IV. 32
Correlation Matrix of Determinants of LEV of Small Size Firms of Food Industry
in India
Variables
LEV_STD
LEV_LTD
.738**
SIZ
AG
GROW
(.00)
LEV_TD
.832** .988**
(.00) (.00)
VOL
COLASS
NDTXSH
1
-.399**
(.00)
SIZ
AG
GROW
.361* .320*
.344*
-.509**
.380*
(.017) (.03)
(.02)
(.00)
(.01)
.517** .400**
.446**
(.00) (.00)
(.00)
.375* .642**
.612** -.370*
.417**
(.01) (.00)
(.00)
(.00)
1
1
.015
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
133
Chapter IV
Table IV. 33
Results of Regression on Determinants of LEV of Small Size Firms of Food
Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
134
Chapter IV
after removing variables COLASS and NDTXSH. The Adj-R2 value is low for
LEV_STD (0.29) and above 40% for LEV_LTD (0.42), and LEV_TD (0.45).
Thus, the regression model fit is above 40% in case of small size firms. The F-stat
is highly significant in all the models revealing that the variability in LEV is
significant with the variability in the predictor variables.
Kaiser-Meyer-Olkin measure reveals (see table IV. 34) about 60% (0.59),
indicating that the factor analysis for the data would be appropriate for small size
firms. The Barletts test also shows a highly significant 2 value (583.73),
affirming that the correlation matrix is not an identity matrix and factor analysis
can be conducted on it.
Table IV. 34
KMO and Bartlett's Test of Determinants of LEV of Small Size Firms of Food
Industry in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.587
583.731
45
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The results of factor analysis (see table IV. 35) shows that the predictor
variables can be reduced to 3 factors; factor 1 constituting of LEV_TD,
LEV_LTD, LEV_STD, AG and GROW; factor 2 constituting COLASS, SIZ and
P; and factor 3 constituting VOL and NDTXSH.
Table IV. 35
Factor Analysis of Determinants of LEV of Small Size Firms of Food Industry in
India
Factor
Eigen value
Factor 1
3.868
Factor 2
1.610
Factor 3
1.265
Variable convergence
LEV_TD
LEV_LTD
LEV_STD
AG
GROW
COLASS
SIZ
P
VOL
NDTXSH
Factor loadings
.943
.917
.838
.657
.631
-.794
.776
.742
.766
-.732
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
135
Chapter IV
20
19.399
15.691
15
10
5
6.471 7.243
0.295
8.155 8.888
0.205
0.298
10.792
0.352
0.262
11.943
12.772
P
LEV_TD
0.319
0.281
0.339
0.304
0.336
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Medium size firms include 31 firms whose average turnover is > Rs.100
crore but < Rs. 500 crore. The firms show (see table IV. 36) higher standard
deviation with regard to LEV. AG also shows a higher standard deviation,
indicating that the firms belonging to different age groups have average turnover
falling in the same range, which in turn, shows that the AG of the firm is not
related to their prosperity. P and GROW show a low deviation, which indicates
that the firms with different sizes of LEV have more or less the same level of P
and GROW.
The correlation matrix (see table IV. 37) of medium size firms shows that
SIZ has highly significant positive correlation with LEV_LTD (0.55**) and
significant positive correlation (0.45*) with LEV_TD, while VOL has significant
negative correlation (-0.37*) with LEV_TD. AG has significant positive
correlation (0.39*) with LEV_STD.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
136
Chapter IV
Table IV. 36
Descriptive Statistics of Determinants of LEV of Medium Size Firms of Food
Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
31
31
31
31
31
31
31
31
31
31
Minimum Maximum
.640
25.727
.804
26.226
1.638
42.223
.009
.234
.099
.711
.009
2.406
-.349
.826
1.603
2.686
13
48
-.054
.422
Mean
4.121
8.032
12.097
.062
.434
.191
.299
2.292
24.26
.131
Std. Deviation
4.639
6.513
9.501
.058
.159
.491
.217
.217
9.143
.105
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
137
Chapter IV
Table IV. 37
Correlation Matrix of Determinants of LEV of Medium Size Firms of Food
Industry in India
Variables
LEV_STD
LEV_LTD
.442*
SIZ
AG GROW
(.013)
LEV_TD
.790** .898**
(.00)
(.00)
-.366*
VOL
(.04)
COLASS
NDTXSH
1
-.519**
(.00)
.553**
SIZ
AG
.451*
-.406*
(.00) (.011)
(.02)
.385*
(.03)
GROW
.379*
(.03)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
138
Chapter IV
Table IV. 38
Results of Regression on Determinants of LEV of Medium Size Firms of Food
Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat
LEV in terms of
total debt
-48.203
(0.03)
-22.799
(0.44)
12.095
(0.40)
-.208
(0.95)
10.844
(0.30)
19.368*
(0.02)
.322
(0.13)
8.125
(0.67)
0.421
0.245
2.394
(0.054)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The Kaiser-Meyer-Olkin measure (see table IV. 39) is only 0.42, which is
quite lower than the minimum level 0.60, hence the factor analysis results may be
only illusionary results. However, the Bartletts Test of sphericity is highly
significant (258.81), proving that the correlation matrix is not an identity matrix
encouraging performing factor analysis on the variables in case of medium size
firms.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
139
Chapter IV
Table IV. 39
KMO and Bartlett's Test of Determinants of LEV of Medium Size Firms of Food
Industry in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.420
258.808
45
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Hence, factor analysis has been carried out and the variables are grouped
into 4 factors. Factor 1 (see table IV. 40) constitutes LEV_STD, LEV_TD and
AG; factor 2 constitutes SIZ, VOL, LEV_LTD; factor 3 constitutes COLASS, P,
and NDTXSH, and factor 4 constitutes only one variable, viz., GROW as it is
not inter related with the other variables so as to constitute a factor.
Table IV. 40
Factor Analysis of Determinants of LEV of Medium Size Firms of Food Industry
in India
Factor
Eigen value
Factor 1
3.126
Factor 2
1.855
Factor 3
1.494
Factor 4
1.155
Variable convergence
LEV_STD
LEV_TD
AG
SIZ
VOL
LEV_LTD
COLASS
P
NDTXSH
GROW
Factor loadings
.813
.765
.756
.870
-.686
.588
.842
-.722
-.647
.935
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
140
Chapter IV
Chart IV.K
Trend Line Showing Relation between P and LEV_TD of Large Size Firms
45
40
35
34.346
38.232
30
25
21.176
20
13.901
15
10
5
0
12.899
14.66
15.627
0.471
0.44
24.97
P
LEV_TD
0.705
0.479
0.478
0.502
20.725
21.205
0.458
1.028
0.75
0.836
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Table IV. 41
Descriptive Statistics of Determinants of LEV of Large Size Firms of Food
Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
12
12
12
12
12
12
12
12
12
12
Minimum Maximum
3.277
41.859
.354
27.648
4.242
69.506
.012
.111
.165
.482
.009
.158
.274
1.389
2.684
3.677
16
51
.057
.381
Mean
11.830
9.944
21.774
.0426
.283
.034
.615
2.984
30.58
.182
Std. Deviation
1.071
9.034
1.850
.029
.104
.042
.330
.284
12.384
.108
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The descriptive statistics of large size firms (see table IV. 41) show that
the standard deviation is very high in case of LEV_LTD as well as in AG, thus
the firms grouped under large size firms have varied level of LTD and the AG of
the firms also varies, which prove that the firms of different AG are grouped as
large size firms. However, P and GROW have comparatively low standard
deviation.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
141
Chapter IV
The correlation matrix (see table IV. 42) of the large size firms shows that
SIZ has significant positive correlation (0.60) with LEV_STD while the other
predictor variables do not have significant correlation with the dependent
variable, LEV. P shows an insignificant negative correlation with LEV unlike the
case of small size and medium size firms. The regression result (see table IV. 43)
of large size firms show that SIZ has significant positive coefficient (34.45) with
LEV_STD. The Adj-R2 value (0.40) also supports that the regression model is
40.4% fit in case of LEV_STD, although the Adj-R2 value is insignificant for the
other cases.
Table IV. 42
Correlation Matrix of Determinants of LEV of Large Size Firms of Food Industry
in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
AG
AG GROW
P
SIZ
SIZ
.594
(.04)
NDTXSH
.597
(.04)
GROW
1
.626
(.02)
1
1
1
.593
(.04)
1
1
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
142
Chapter IV
Table IV. 43
Results of Regression on Determinants of LEV of Large Size Firms of Food
Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The KMO result shows that the coefficient of correlation is not positive
definite and so factor analysis is not carried out.
IV.17 Income-wise Analysis of Determinants of LEV
There are different views about the impact of income earned on CS. To
illustrate, more profitable firms tend to issue more debt as debt capital may be
available to them at a cheaper rate (Chen and Zhao 2004)69, however it is
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
143
Chapter IV
recommendable that more profitable firms should hold less debt because higher
profit generates more internal funds (Bevan and Dabnolt 2002)70. The firms
within the same income size range are grouped together to analyze the impact of
PBITD. The firms are grouped into three sub-categories viz., low income size
firms with profit (PBITD) < Rs.10 crore; medium income size firms with profit
> Rs.10 crore but < Rs.50 crore; high income size firms with income >Rs.50
crore. The average income (PBITD) for the period of 10 years under study is
considered for this purpose.
IV.17.1 Analysis of Low Income Size Firms
The low income size firms trend line shows (see chart IV.L) that there is
a steep rise in the level of external borrowings with a slight rise in P. However,
there is a steep fall in LEV_TD after the year 2007-08. The trend line is similar
to that of the small size firms, which fact shows the instability in case of low
income size firms.
Chart IV.L
Trend Line Showing Relation between P and LEV_TD of Low Income Size
Firms
12
10
9.679
8
6.948
6
4
4.904
4.047
3.64
4.437
4.265
2
0
0.111
0.119
5.304
0.211
4.782
0.151
0.174
0.133
7.465
LEV_TD
0.238
0.137
0.38
0.3
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The descriptive statistics of 54 low income size firms show (see table IV.
44) that the standard deviation for LEV_STD, LEV_LTD, and LEV_TD is very
high and AG also shows a high level of deviation. The firms of different
incorporation years fall under low Income size firms. The maximum AG is 53
and the minimum AG is 15, which could clearly explain that mere existence for a
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
144
Chapter IV
longer period has not done any good things to improve their income level. The
size of borrowing also varies among the firms listed under low income size firms
though the P does not show relatively high standard deviation.
Table IV. 44
Descriptive Statistics of Determinants of LEV of Low Income Size Firms of Food
Industry in India
Variables
N
Minimum Maximum
Mean Std. Deviation
LEV_STD
54
.036
25.727
2.055
3.861
LEV_LTD
54
.089
48.860
3.492
7.105
LEV_TD
54
.186
57.282
5.547
9.699
VOL
54
.009
.759
.1044
.139
COLASS
54
.034
.836
.456
.193
NDTXSH
54
-4.890
16.005
.422
2.560
P
54
-.349
1.008
.200
.248
SIZ
54
-.905
2.457
1.367
.812
AG
54
15
53
22.52
9.668
GROW
54
-.174
.463
.036
.120
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The correlation coefficient (see table IV. 45) of the low income size firms
show that AG (0.53) with LEV_STD, and SIZ have significant positive
correlation (0.33) with LEV_STD. With regard to LEV_LTD, GROW (0.50)
and AG (0.44) have highly significant positive correlation with LEV_LTD while
SIZ has significant positive correlation (0.30) with LEV_LTD. GROW (0.43),
AG (0.54), and SIZ (0.35) have highly significant positive correlation with
LEV_TD. In low income size firms, GROW, AG, and SIZ play a significant role
in determining the size of LEV as that of in small size firms.
The regression result (see table IV. 46) of the low income size firms show
that AG has highly significant positive coefficient with LEV_STD (0.20),
LEV_LTD (0.30) and LEV_TD (0.50). GROW has highly significant positive
coefficient with LEV_LTD (29.55) and LEV_TD (28.83) while SIZ has
significant positive coefficient with LEV_STD. The Adj-R2 value is 0.42 for
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
145
Chapter IV
LEV_TD, indicating that the model is 40% fit in case of LEV_TD. The Adj-R2
value is comparatively lesser in case of LEV_STD and LEV_LTD. The F-stat is,
however, highly significant in case of LEV_STD (4.02), LEV_LTD (5.66), and
LEV_TD (6.37), indicating that variance of the dependent variable is
significantly related to the variance of the predictor variables.
Table IV. 45
Correlation Matrix of Determinants of LEV of Low Income Size Firms of Food
Industry in India
Variables
1
1
GROW
AG GROW
NDTXSH
AG
SIZ
COLASS
SIZ
.328
(.015)
.529
(.00)
.301
(.02)
.444
(.00)
.499
(.00)
.351
(.00)
.535
(.00)
.434 -.327
(.00) (.016)
-.404
(.00)
-.510
(.00)
1
.303
(.02)
1
1
-.273
(.04)
.323
(.017)
.437
(.00)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
146
Chapter IV
Table IV. 46
Results of Regression on Determinants of LEV of Low Income Size Firms of
Food Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
147
Chapter IV
.543
694.203
45
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Table IV. 48
Factor Analysis of Determinants of LEV of Low Income Size Firms of Food
Industry in India
Factor
Eigen value
Factor 1
3.471
Factor 2
1.877
Factor 3
1.172
Variable convergence
LEV_TD
LEV_LTD
LEV_STD
AG
COLASS
SIZ
P
GROW
NDTXSH
VOL
Factor loadings
0.954
0.867
0.800
0.719
-0.776
0.747
0.725
0.595
0.792
-0.715
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
148
Chapter IV
Chart IV.M
Trend Line Showing Relation between P and LEV_TD of Medium Income Size
Firms
30
26.513
25
20
28.142
17.881
13.653
15
14.725
LEV_TD
P
10.33
7.493
10
13.728
8.322
5
7.133
0.2681
0.352
0
0.321
0.316
0.413
0.32
0.321
0.434
0.355
0.405
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The descriptive statistics of medium income size firms (see table IV. 49)
show that LEV_STD, LEV_LTD, and LEV_TD have comparatively higher
standard deviation, indicating that the firms grouped as medium income size
firms have different sizes of borrowings, and the AG also has higher standard
deviation, indicating a wider range of firms with varied AG falling under the
same category. The P and GROW, however, have comparatively lesser
deviations.
The correlation matrix of medium income size firms (see table IV, 50)
shows that P has significant positive correlation with LEV_LTD (0.44), and
LEV_TD (0.44), while it showed an insignificant positive correlation with LEV.
GROW also has significant positive correlation with LEV_TD in case of medium
income size firms, while AG has an insignificant negative correlation with
LEV_STD, LEV_LTD, and LEV_TD.
149
Chapter IV
Table IV. 49
Descriptive Statistics of Determinants of LEV of Medium Income Size Firms of
Food Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
22
22
22
22
22
22
22
22
22
22
Minimum Maximum
1.111
16.199
.965
30.349
4.242
40.566
.010
.120
.099
.711
.007
.340
.079
.919
1.945
2.947
13
48
.018
.422
Mean
Std. Deviation
5.005
3.967
9.861
7.541
14.792
9.485
.047
.031
.424
.175
.058
.092
.350
.199
2.408
.259
24.77
7.904
.148
.104
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The regression result of the medium income size firms (see table IV. 51)
shows that GROW has significant positive coefficient (15.41) with LEV_STD in
model 2 after removing the predictor variables NDTXSH, P, SIZ and AG. The
Adj- R2 value of model 2 is increased from 0.07 in model 1 for LEV_STD to 0.26.
The F-stat value is significant at 5% level (3.45) in model 2, proving the
predictability of variance of dependent variables by the predictor variable.
The predictor variable, VOL has significant negative coefficient in models
1 (-105.77) and 2 (-98.70) with LEV_LTD. P also has highly significant positive
coefficient with LEV_LTD in models 1 (31.96) and 2 (35.96) after removing
predictors SIZ, AG, and GROW, which proves that medium income size firms
do not have sufficient retained earnings and depend on external borrowing,
hence their LEV increases with P as they borrow more to utilize the growth
opportunities. COLASS has highly significant positive coefficient with
LEV_LTD (27.75) in model 2 as the predictor variable VOL has significant
negative coefficient in models 1 (-105.77) and 2 (-98.70) with LEV_LTD. P also
has highly significant positive coefficient with LEV_LTD in models 1 (31.96)
and 2 (35.96) after removing SIZ, AG and GROW, which reveals that medium
income size firms do not have sufficient retained earnings and depend on
external borrowing, hence their LEV increases with P as they borrow more to
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
150
Chapter IV
LEV_LTD
GROW
1
1
NDTXSH
1
.438 .443
(.04) (.03)
AG
GROW
AG
COLASS
SIZ
SIZ
-.429
(.04)
-.662
(.00)
.445
(.03)
1
1
1
.480
(.02)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
151
Chapter IV
Table IV. 51
Results of Regression on Determinants of LEV of Medium Income Size Firms of
Food Industry in India
Variables
(Constant)
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
152
Chapter IV
Table IV. 52
KMO and Bartlett's Test of Determinants of LEV of Medium Income Size Firms
of Food Industry in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.362
188.216
45
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The KMO (see table IV. 52) measure (0.36) is not satisfactory to conduct
a factor analysis, however, the Bartletts test is highly significant (188.22),
encouraging to conduct factor analysis. Factors of medium income size firms (see
table IV. 53) comprises of LEV_TD, LEV_LTD, GROW, NDTXSH and
LEV_STD of factor 1, while factor 2 constitutes SIZ, VOL and AG. Factor 3
constitutes COLASS and P.
Table IV. 53
Factor Analysis of Determinants of LEV of Medium Income Size Firms of Food
Industry in India
Factor
Eigen value
Factor 1
3.327
Factor 2
1.865
Factor 3
1.664
Variable
convergence
LEV_TD
LEV_LTD
GROW
NDTXSH
LEV_STD
SIZ
VOL
AG
COLASS
P
Factor
loadings
0.920
0.918
0.630
0.563
0.465
0.887
-0.617
-0.601
-0.858
0.842
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
153
Chapter IV
37.958
35.768
35
30
25
16.308
20
15
10
14.787
5
0
26.207
24.714
22.168
21.126
0.573
0.658
16.961
0.446
0.406
LEV_TD
17.401
P
0.479
0.492
0.758
0.751
1.035
0.888
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The descriptive statistics (see table IV. 54) of high income size firms show
comparatively a lesser standard deviation in case of LEV when compared to that
of the firms under other categories, which shows that firms grouped as higher
income size firms have more or less same size of external borrowings. The P and
GROW show a lesser standard deviation. The AG, however, shows a higher level
of standard deviation, indicating that the firms under the category of higher
income size firms are also varied with AG.
The correlation results of high income size firms (see table IV. 55) show
that SIZ has significant positive correlation (0.70) with LEV_STD. AG has
insignificant negative relation with LEV, while P has significant negative relation
with LEV_LTD (-0.60) at 10% level, which reveals that the negative relation
between P and LEV increases with SIZ (though the results are not significant at
1% and 5% levels).
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
154
Chapter IV
Table IV. 54
Descriptive Statistics of Determinants of LEV of High Income Size Firms of Food
Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
10
10
10
10
10
10
10
10
10
10
Minimum Maximum
1.475
41.859
.354
27.648
6.009
69.506
.013
.207
.165
.615
.011293
.051
.211
1.389
2.365
3.677
16
51
.070
.381
Mean
11.426
11.914
23.340
.063
.347
.030
.649
2.964
31.30
.167
Std. Deviation
1.176
1.029
2.020
.058
.146
.014
.357
.365
13.284
.094
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The regression result shows (see table IV. 56) that NDTXSH (-419.09)
and P (-22.59) have significant negative coefficient with LEV_STD in model 2
after removing COLASS and AG. SIZ has highly significant coefficient with
LEV_STD (25.86) in models 2 & 3 (28.13) after removing VOL in addition to
the variables removed under model 2 of LEV_STD. P also has highly significant
negative coefficient with LEV_STD (-20.15) under model 3 of LEV_STD with
Adj-R2 value 0.75, in model 1 of LEV_STD, 0.84 in model 2 and 0.85 in model 3.
Hence, the predictor variables could predict the dependent variable, LEV_STD
above 50%, thereby it leads to conclude that P, SIZ and NDTXSH are the major
predictors of LEV_STD in case of high income size firms.
P (-30.80) and GROW (-74.58) have highly significant negative coefficient with LEV_LTD in model 2 after removing the predictor variables SIZ
and AG, which fact shows that P and growth in total asset have negative effect
on LEV when their income grows. NDTXSH (-590.83) and VOL (163.73) have
significant negative coefficient with LEV_LTD in case of higher income size
firms, which is supported by F-stat value (25.43). P also has highly significant
negative coefficient with LEV_TD (-54.96) in model 2, after removing COLASS
and AG, which emphasizes the impact of income size on the relation between P
and LEV_TD. On the other hand, SIZ has highly significant positive coefficient
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
155
Chapter IV
.677*
1
(.03)
.927** .904**
(.00) (.00)
VOL
SIZ
AG
GROW
1
1
.789**
(.00)
COLASS
NDTXSH
1
.733*
(.016)
P
SIZ
1
1
.701*
(.02)
AG
GROW
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
156
Chapter IV
Table IV. 56
Results of Regression on Determinants of LEV of High Income Size Firms of
Food Industry in India
Un-standardized Coefficients Beta Value
LEV in terms of short term debt LEV in terms of
LEV in terms of total
Variables
long term debt
debt
Model 1 Model 2 Model 3 Model 1 Model 2 Model 1 Model 2
(Constant) -28.657 -29.378 -41.526 61.335 65.966
32.678
36.329
(0.46)
(0.22)
(0.02) (0.09)
(0.00)
(0.36)
(0.15)
VOL
-63.497 -34.869
-160.963 -163.726* -224.460 -170.745*
(0.54)
(0.44)
(0.10)
(0.01)
(0.10)
(0.01)
COLASS
14.186
19.542 18.035
33.728
(0.83)
(0.65)
(0.52)
(0.58)
NDTXSH -521.224 -419.090* -416.39* -604.593 -590.826* -1125.817 -911.166**
(0.29)
(0.04)
(0.02) (0.12)
(0.02)
(0.07)
(0.00)
P
-24.750 -22.592* -20.15** -30.997 -30.803** -55.747* -54.959**
(0.16)
(0.01)
(0.00) (0.05)
(0.00)
(0.03)
(0.00)
SIZ
24.350 25.866** 28.128** 1.254
25.603
26.876**
(0.08)
(0.00)
(0.00) (0.81)
(0.06)
(0.00)
AG
0.142
0.017
0.159
(0.62)
(0.92)
(0.53)
GROW
-35.622 -39.470 -30.058 -73.286 -74.576** -108.908 -114.875**
(0.37)
(0.18)
(0.21) (0.06)
(0.00)
(0.05)
(0.01)
2
R
0.945
0.931
0.918
0.971
0.969
0.986
0.976
Adj-R2
0.751
0.844
0.853
0.872
0.931
0.935
0.946
F Stat
4.876
10.734* 14.080** 9.732 25.425** 19.490*
32.592**
(0.18)
(0.02)
(0.00) (0.09)
(0.00)
(0.05)
(0.00)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
157
Chapter IV
11.265
8.002
6.409
5.807
0.165
11.23
18.935
12.47
LEV_TD
11.183
7.412
0.218
0.239
0.194
0.265
0.29
0.351
0.241
0.602
0.274
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The descriptive statistics (see table IV. 57) of the firms in sector I show
that LEV_STD and LEV_LTD have higher standard deviation but the standard
deviation of LEV_TD is comparatively very less, hence though the firms in
sector I have varied level of STD and LTD, their TD remains more or less closer
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
158
Chapter IV
to its mean values. The AG shows a higher standard deviation, indicating that a
wide range of firms with different AG comes under sector I. The NDTXSH also
has higher standard deviation, indicating the varied depreciation policy used by
the firms.
Table IV. 57
Descriptive Statistics of Determinants of LEV of Firms of Sector I of Food
Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
32
32
32
32
32
32
32
32
32
32
Minimum Maximum
.086
41.859
.093
27.648
.326
69.506
.013
.570
.034
.739
-4.89
16.005
-.349
.923
-.845
3.677
13
53
-.061
.422
Mean
5.040
5.948
10.988
.0744
.343
.701
.284
2.006
22.28
.099
Std. Deviation
7.819
7.069
1.374
.105
.137
3.319
.258
.847
8.509
.129
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The correlation matrix (see table IV. 58) of the firms in sector I shows
that GROW has highly significant positive correlation with LEV_STD (0.48),
LEV_LTD (0.65) and LEV_TD (0.61). SIZ also has highly significant positive
correlation with LEV_STD (0.57), LEV_LTD (0.55) and LEV_TD (0.61), while
the other variables have insignificant correlation with LEV, P has insignificant
positive correlation with LEV.
The multiple regression result of sector I (see table IV. 59) shows that SIZ
has significant positive co-efficient with LEV_STD in model 2 (3.75) after
removing VOL, NDTXSH and P. The Adj-R2 value in model 2 of LEV_STD is
0.27, which shows that the model poorly fits for LEV_STD. GROW shows
highly significant positive coefficient with LEV_LTD in models 1 (33.22) & 2
(27.20) after removing variables VOL, NDTXSH, P and AG. SIZ has
significantly positive coefficient (2.98) with LEV_LTD in model 2. The model fit
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
159
Chapter IV
is about 50% (the Adj R2 value 0.49) showing that the predictor variables in the
model 2 are 50% determinants of LEV_LTD of sector I. SIZ has significant
positive coefficient in models 1 (6.80) & 2 (5.89) of LEV_TD. GROW has also a
significant positive coefficient in models 1 (48.27) & 2 (44.49) of LEV_TD. The
model fits only 40% (Adj-R2 value is 0.45) in case of LEV_TD. The F-stat value
is however significant in all cases indicating that the variance of the explaining
variables is significantly related to the variance in the LEV.
Table IV. 58
Correlation Matrix of Determinants of LEV of Firms of Sector I of Food Industry
in India
Variables
LEV_STD
LEV_LTD
LEV_TD
AG GROW
1
.914**
(.00)
VOL
COLASS
NDTXSH
P
SIZ
SIZ
1
.570**
(.00)
.547** .606**
(.00) (.00)
AG
GROW
1
.480**
(.00)
.566**
(.00)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
160
Chapter IV
Table IV. 59
Results of Regression on Determinants of LEV of Firms of Sector I of Food
Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The KMO result shows that the correlation was not positive definite, and
the data are not appropriate for a factor analysis.
IV.18.2 Analysis of Sector II
The trend line of relation between P and LEV_TD of firms of sector II
shows (see chart IV.P) that the level of borrowing took a deep plunge in the year
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
161
Chapter IV
2008-09 as in the case of small size and low income size firms, hence, sector I
constitutes firms which are comparatively smaller in size, and their external
borrowing is affected by environmental changes.
Chart IV.P
Trend Line Showing Relation between P and LEV_TD of Firms of Sector II
30
24.693
25
21.475
20
15
8.321
10
5
0
15.98
10.64
7.408
0.23
0.281
8.359
9.472
0.219
0.195
10.74
0.269
0.257
LEV_TD
11.785
0.409
0.394
0.431
0.542
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The descriptive statistics (see table IV. 60) of firms in sector II show that
the standard deviation is high in case of LEV_STD but in case of LEV_LTD and
LEV_TD it is comparatively lesser. Therefore, the firms in sector II have wider
variation in their short term borrowings while the size of outside debt, however,
remains same among the firms in sector II. The other variables have
comparatively lesser deviation. AG, however, as that of the other categories,
shows a higher standard deviation.
The correlation matrix of firms in sector II shows (see table IV. 61) that
AG has highly significant positive correlation (0.56) with LEV_STD, while P
(0.39) and SIZ (0.42) have significant positive correlation with LEV_STD.
GROW has significant positive correlation with LEV_LTD (0.51) at 1% level,
and LEV_TD (0.42) at 5% level.
162
Chapter IV
Table IV. 60
Descriptive Statistics of Determinants of LEV of Firms of Sector II of Food
Industry in India
Variables
Minimum Maximum
Mean
Std. Deviation
LEV_STD
30
.081
25.727
5.008
5.693
LEV_LTD
30
.149
48.860
7.937
1.084
LEV_TD
30
.23
57.282
12.887
1.470
VOL
30
.009
.289
.063
.056
COLASS
30
.165
.836
.499
.177
NDTXSH
30
.007
.098
.031
.019
30
-.017
1.389
.323
.328
SIZ
30
-.905
3.385
1.976
.925
AG
30
15
52
29.03
11.340
GROW
30
-.066
.463
.093
.122
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The multiple regression result of firms of sector II shows (see table IV. 62)
that AG has significant coefficient with LEV_STD (0.25*) in models 1 & 2
(0.24**). SIZ has significant coefficient (2.099) with LEV_STD. GROW has
significant coefficient with LEV_LTD (model 1 (57.54**) & 2 (57.55**)) as well
as in LEV_TD (model 1 (58.15*) & 2 (57.74*)), hence, GROW has been a
significant determinant of size of external borrowings of firms of sector II.
However, the Adj-R2 value is insignificant in all the models, revealing that the
regression model fits poorly for firms in sector II.
Kaiser-Meyer-Olkin measure (see table IV. 63) is not adequate (0.44) to
support a factor analysis. However, Bartletts Test of sphericity is significant at
1% level, indicating that the correlation matrix is not an identity matrix and
factor analysis could well be conducted.
163
Chapter IV
Table IV. 61
Correlation Matrix of Determinants of LEV of Firms of Sector II of Food
Industry in India
Variables
AG
GROW
AG GROW
1
1
.418*
(.02)
NDTXSH
SIZ
SIZ
COLASS
.388*
(.03)
.415*
(.02)
.556**
(.00)
1
-.675**
(.00)
-.554**
(.00)
.510** .418*
(.00) (.02)
1
.541**
(.00)
.458*
(.011)
1
1
.394*
(.03)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
164
Chapter IV
Table IV. 62
Results of Regression of Determinants of LEV of Firms of Sector II of Food
Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat
-19.439
(0.69)
2.099*
(0.04)
0.241**
(0.00)
0.415
0.347
6.147**
(0.00)
-197.064
(0.16)
-4.630
(0.61)
2.510
(0.36)
0.166
(0.41)
57.538**
(0.00)
0.375
0.176
1.883
(0.12)
-220.602
(0.07)
2.526
(0.32)
57.551**
(0.00)
0.355
0.251
3.436*
(0.02)
-254.113
(0.18)
-4.556
(0.71)
5.054
(0.18)
0.417
(0.14)
58.154*
(0.02)
0.370
0.169
1.844
(0.12)
-246.062
(0.15)
4.723
(0.19)
0.354
(0.12)
57.742*
(0.02)
0.364
0.232
2.751*
(0.04)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The combination of variables as factors for sector II shows (see table IV.
64) that factor 1 constitutes LEV_TD, LEV_LTD, and LEV_STD. Factor 2
constitutes P, COLASS, and SIZ. Factor 3 constitutes NDTXSH, VOL, AG and
GROW, indicating interrelation between the variables grouped in to factors.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
165
Chapter IV
Table IV. 63
KMO and Bartlett's Test of Determinants of LEV of Firms of Sector II of Food
Industry in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.439
317.011
45
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Table IV. 64
Factor Analysis of Determinants of LEV of Firms of Sector II of Food Industry in
India
Factor
Eigen value
Factor 1
3.696
Factor 2
1.823
Factor 3
1.623
Variable
convergence
LEV_TD
LEV_LTD
LEV_STD
P
COLASS
SIZ
NDTXSH
VOL
AG
GROW
Factor
loadings
.976
.947
.724
.889
-.853
.750
.813
.700
-.541
.502
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
166
Chapter IV
Chart IV.Q
Trend Line Showing Relation between P and LEV_TD of Firms of Sector III
8
7
6
5
4
3
2
1
0
4.193
3.822
3.888
3.961
5.05
7.226
6.319
5.174
4.078
LEV_TD
P
0.285
0.248
6.342
0.196
0.163
0.267
0.237
0.27
0.186
0.271
0.373
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The descriptive statistics (see table IV. 65) of firms in sector III indicate a
higher degree of standard deviation in case of LEV_LTD and LEV_TD,
indicating that the external long term borrowings of the firms under sector III
vary widely as per their requirements, whereas the standard deviation of
LEV_STD is comparatively lower, indicating that the firms have more or less the
same size of short term borrowings. The deviation in P is comparatively low for
all the firms.
Table IV. 65
Descriptive Statistics of Determinants of LEV of Firms of Sector III of Food
Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
24
24
24
24
24
24
24
24
24
24
Minimum Maximum
.036
3.904
.089
18.249
.186
20.047
.009
.759
.099
.831
.014
.125
-.278
1.008
-.413
2.804
15
48
-.174
.316
Mean
.991
4.008
5.005
.127
.477
.043
.259
1.373
20.42
.037
Std. Deviation
1.070
5.428
6.261
.166
.206
.029
.281
.823
7.751
.122
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
167
Chapter IV
The correlation matrix of sector III shows (see table IV. 66) that SIZ has
highly significant correlation with LEV_STD (0.54), with LEV_LTD (0.71) as
well as with LEV_TD (0.71). The GROW has a significant correlation with
LEV_LTD (0.46) as well as with LEV_TD (0.44). While P has significant
positive correlation with LEV_LTD (0.41), NDTXSH has significant negative
correlation (-0.42) with LEV_STD. P, having significant positive correlation
(0.41) with LEV_LTD, matches with medium income size firms correlation
result, therefore the firms in sector III earns medium income which is not
adequate to utilize the growth opportunities and therefore they borrow from
external sources as they grow (as their P increases).
Table IV. 66
Correlation Matrix of Determinants of LEV of Firms of Sector III Food Industry in India
Variables
LEV LEV LEV
_STD _LTD _TD VOL COLASS NDTXSH P
SIZ AG GROW
LEV_STD
1
LEV_LTD
LEV_TD
.742
1
(.00)
.815 .993
(.00) (.00)
VOL
COLASS
NDTXSH
-.424
(.03)
.405
-.518
(.05)
(.01)
.544 .712 .710
(.00) (.00) (.00)
SIZ
-.415
(.04)
.532
(.00)
-.644
(.00)
-.498
(.013)
1
1
-.598
(.00)
.655
(.00)
AG
GROW
-.437
(.03)
.446
(.02)
.676
(.00)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
168
Chapter IV
The regression result of firms in sector III shows (see table IV. 67) that
though P is correlated with LEV, it is not a significant determinant of LEV. P has
no significant coefficient with LEV, and it is not a significant determinant of
LEV. The regression run shows that P has insignificant negative coefficient with
LEV. SIZ has significant coefficient (0.77) with LEV_STD in model 2 after
removing the effects of COLASS, NDTXSH and P. It also has significant positive
coefficient (5.95) with LEV_LTD in model 1 and highly significant coefficient
(5.45) with LEV_LTD in model 2. SIZ has significant coefficient with LEV_TD
(6.74) in model 1 and highly significant coefficient with LEV_TD (6.50) in
model 2 after removing COLASS, NDTXSH and GROW.
Table IV. 67
Results of Regression on Determinants of LEV of Firms of Sector III of Food
Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
169
Chapter IV
The Kaiser-Meyer-Olkin measure (see table IV. 68) is 0.60, indicating that
the factor analysis will be able to converge the variables into reasonable factors.
Bartletts Test also has highly significant 2 value (308.44), encouraging to run of
factor analysis.
Table IV. 68
KMO and Bartlett's Test of Determinants of LEV of Firms of Sector III of Food
Industry in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.604
308.441
45
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The factor analysis result shows (see table IV. 69) that LEV_TD,
LEV_LTD and LEV_STD converges into factor1; P, COLASS, VOL, SIZ,
GROW, NDTXSH converges into factor 2 and AG constitutes factor 3 as it has
no significant interrelation with other variables.
Table IV. 69
Factor Analysis of Determinants of LEV of Firms of Sector III of Food Industry in India
Factor
Eigen value
Variable
Factor
convergence
loadings
LEV_TD
0.935
Factor 1
4.961
LEV_LTD
0.910
LEV_STD
0.859
P
.831
COLASS
-.768
VOL
-.679
Factor 2
1.423
SIZ
.649
GROW
.594
NDTXSH
-.555
Factor 3
1.027
AG
.803
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
170
Chapter IV
IV.19 Conclusion
The analysis conducted to study the determinants of CS and the endeavor to
draw attention on the impact of size and sectoral difference have proved to be
interesting and some significant conclusion is drawn about the food industry.
IV.19.1 Overall Analysis
The overall results of equation I show that GROW, AG, and SIZ have
significant positive correlation with LEV_STD, LEV_LTD and LEV_TD while, P has
significant positive correlation with LEV_STD, which fact coincides with that of Long
and Malitz (1985)71, Pandey (2004)72 who found a positive relation between P and
LEV. However, the results of Myers (1984)73, Titman and Wessels (1988)74, Kester
(1986)75, Friend and Hasbrouch (1988)76, Friend & Lang (1988)77, and Chen and
Zhao (2004)78 who found a negative impact between P and LEV has been untrue in
case of food industry in India. Thus, the hypothesis Ho8 is rejected. While, SIZ, AG, and
GROW have highly significant positive correlation with LEV_STD, LEV_LTD, &
LEV_TD, COLASS has significant negative correlation with LEV_STD which coincides
with the findings of Titman and Wessels (1988) 79. On the other hand, VOL has significant
negative correlation with LEV_TD. Hence the hypotheses Ho10, Ho11, and Ho12 are rejected
and Ho9 which states that, there is no significant relation between non debt tax shield and
leverage is accepted.
171
Chapter IV
Hypotheses
LEV_STD
Ho = There is no significant
relationship between profitability
+ve*
and leverage.
Rejected
8
Accepted
Table IV.70
Summary of Overall Results of the Determinants of LEV
LEV_LTD
LEV_TD
Accepted
+ve*
Rejected
Accepted
Accepted
-ve*
Rejected
Accepted
Accepted
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
Accepted
-ve*
Rejected
Accepted
Supporting works
Long and Malitz (1985) and Pandey (2004) predicted a positive
relation between CS and P. Myers (1984), Titman and Wessels
(1988), Barton and Gordon (1988), Johnson (1998), Booth Collins
et al. (2001), and Fama and French (2002) argued that there is a
negative relationship between P and LEV.
Fisher, Heinkel, and Zechner (1989) provided evidence that tax
benefits to debt are mostly negligible.
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
172
Chapter IV
173
Chapter IV
Hypotheses
8
Ho = There is no
significant relationship
between profitability
and leverage.
Ho9 = There is no
significant relationship
between non debt tax
shield and leverage.
Ho10 = There is no
significant relationship
between collateral assets
and leverage.
Ho11= There is no
significant relationship
between growth and
leverage.
Ho12 = There is no
significant relationship
between volatility and
leverage.
Table IV.71
Summary of Sales Size-wise Analysis of the Determinants of LEV
STD
LTD
TD
STD
LTD
TD
STD
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
+ve*
Rejected
+ve**
Rejected
+ve**
Rejected
Accepted
Accepted
Accepted
LTD
TD
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
+ve*
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
-ve*
Rejected
Accepted
Accepted
Accepted
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
174
Chapter IV
175
Chapter IV
Hypotheses
8
Ho = There is no
significant relationship
between profitability
and leverage.
Ho9 = There is no
significant relationship
between non debt tax
shield and leverage.
Ho10 = There is no
significant relationship
between collateral assets
and leverage.
Ho11= There is no
significant relationship
between growth and
leverage.
Ho12 = There is no
significant relationship
between volatility and
leverage.
Table IV.72
Summary of Income Size-wise Analysis of the Determinants of LEV
STD
LTD
TD
STD
LTD
TD
STD
LTD
TD
Accepted
Accepted
Accepted
Accepted
+ve*
Rejected
+ve*
Rejected
-ve*
Rejected
-ve**
Rejected
-ve**
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
-ve*
Rejected
-ve*
Rejected
-ve*
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
+ve**
Rejected
+ve**
Rejected
Accepted
Accepted
+ve*
Rejected
-ve*
Rejected
-ve**
Rejected
-ve**
Rejected
Accepted
Accepted
Accepted
Accepted
-ve*
Rejected
-ve*
Rejected
Accepted
Accepted
Accepted
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
176
Chapter IV
Hypotheses
8
Ho = There is no
significant relationship
between profitability and
leverage.
Ho9 = There is no
significant relationship
between non debt tax
shield and leverage.
Ho10 = There is no
significant relationship
between collateral assets
and leverage.
Ho11= There is no
significant relationship
between growth and
leverage.
Ho12 = There is no
significant relationship
between volatility and
leverage.
Table IV.73
Summary of Sector-wise Analysis of the Determinants of LEV
STD
LTD
TD
STD
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
LTD
TD
STD
+ve*
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
Accepted
Accepted
Accepted
LTD
TD
Accepted
+ve*
Rejected
Accepted
Accepted
-ve*
Rejected
Accepted
-ve*
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
+ve**
Rejected
+ve*
Rejected
Accepted
+ve*
Rejected
+ve*
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
177
Chapter IV
175
Chapter IV
To study the impact of SIZ and sectoral differences the following hypotheses
are assumed in addition.
Ho19 = There is no significant influence of size in deviating the relationship between
Variables
Table IV.74
Ratios of Independent Variables Determining P
Description
P_TASSET PBITD / Total Assets
Inference
It indicates the return on assets invested.
High value denotes large return on asset
and vice versa
It indicates the profit margin earned on
turnover of firm. A high value implies a
great profit margin and vice versa
It indicates the proportion of current assets
to total assets. A low value indicates more
aggressive use of assets for increasing
earnings and vice versa
It indicates how intensively the assets are
used to increase turnover. A low value
indicates large turnover for the investment
in assets and vice versa
Turnover adjusted for fluctuation over years
The growth of total asset over years
P_SAL
PBITD / Sales
AIP
CAPINS
SIZ
GROW
VOL
176
Chapter IV
P_SAL
P_TASSET
-0.3
-0.4
-0.5
-0.6
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The correlation result (see table IV. 76) shows that VOL has highly
significant negative correlation (-0.33) with P_TASSET while GROW (0.42) and
SIZ (0.50) have highly significant positive correlation with P_TASSET. The impact
of VOL on P is put to light through this correlation matrix. On the other hand,
CAPINS shows a highly significant negative correlation (-0.91) with P_SAL, and
SIZ has significant positive correlations (0.27) with P_SAL.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
177
Chapter IV
Table IV. 75
Overall Descriptive Statistics of Determinants of P of Food Industry in India
Variables
N
Minimum Maximum
Mean
Std. Deviation
P_TASSET
86
-.28
.431
.084
.082
P_SAL
86
-7.644
2.239
.020
.877
AIP
86
.060
.894
.482
.194
CAPINS
86
.154
235.270
5.392
2.586
SIZ
86
-.905
3.677
1.819
.903
GROW
86
-.174
.463
.080
.126
VOL
86
.009
.759
.085
.115
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Table IV. 76
Overall Correlation Matrix of Determinants of P of Food Industry in India
Variables
P_TASSET P_SAL
P_TASSET
1
P_SAL
AIP
VOL
GROW
VOL
CAPINS
GROW
SIZ
AIP
SIZ
CAPINS
.502
(.00)
.420
(.00)
-.327
(.00)
-.910
(.00)
.266
(.01)
1
.447
(.00)
.276
(.01)
-.430
(.00)
1
.558
(.00)
-.299
(.00)
1
-.348
(.00)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
178
Chapter IV
The overall regression result shows (see table IV. 77) that AIP has highly
significant negative coefficient with P_TASSET in models 1 (-0.13) & 2 (-0.12) after
removing the effects of CAPINS and GROW. SIZ has highly a significant positive
coefficient with P_TASSET in model 1 (0.05) & 2 (0.05). CAPINS is one of the
major variables determining P_SAL, which has highly significant coefficient with
P_SAL in models 1(-0.03) & 2 (-0.03) after removing GROW and VOL. AIP has
significant negative coefficient (-0.43) with P_SAL in model 2. SIZ has a significant
negative coefficient (-0.11) with P_SAL in model 2 while it has a positive impact on
P_TASSET. The Adj-R2 value for P_TASSET is only about 33% (0.33 each in
model 1 and model 2 respectively), indicating that the predictor variables determine
the dependent variable P_TASSET to the extent of 33% only and there are other
predictors influencing P_TASSET. The Adj-R2 value for P_SAL is about 84% (0.85
in model 1 and 0.85 in model 2), indicating that the regression model fits above
84% for P_SAL. The F-stat is also highly significant in all the cases, indicating that
the variance in the explaining variables is assisted by variance in the dependent
variables.
The Kaiser-Meyer-Olkin measure (see table IV. 78) is 0.58, hence the factor
analysis conducted would give a statistically significant result. Bartletts test 2 value
(284.84) is highly significant, stating that the correlation matrix is not an identity
matrix and factor analysis shall be conducted with these variables.
The factor analysis (see table IV. 79) converges P_TASSET, GROW, VOL
and SIZ as factor 1, indicating the interrelation among them. P_SAL and CAPINS
are converged as factor 2 stressing the relation between P_SAL and CAPINS which
was also put forth by the overall correlation and regression results. AIP constitutes
factor 3, indicating that it has a lesser relation with the other variables.
179
Chapter IV
Table IV. 77
Overall Results of Regression on Determinants of P of Food Industry in India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Table IV. 78
KMO and Bartlett's Test of Determinants of P of Food Industry in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.575
284.837
21
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
180
Chapter IV
Table IV. 79
Overall Factor Analysis of Determinants of P of Food Industry in India
Factor
Eigen value
Factor 1
2.721
Factor 2
1.724
Factor 3
1.016
Variable
convergence
P_TASSET
GROW
VOL
SIZ
P_SAL
CAPINS
AIP
Factor
loadings
0.825
0.723
-0.679
0.644
0.967
-0.957
0.944
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
181
Chapter IV
Chart IV.S
Trend Line Showing Comparison between P_TASSET of Small Size Firms, Medium
Size Firms and Large Size Firms
0.2
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The trend line of P_SAL of small size firms shows (see chart IV.T) that the
profit margin of the firms has higher degree of fluctuation during the period of
study, thus they have the tendency to use opportunities and increase the profit
margin and when the situation is not good they reduce their profit margin. This is
apparent through the trend line rising steeply during the period 2008-09 above the
lines of medium size firms as well as large size firms. On the other hand, the trend
lines of medium size firms and large size firms show that they have a stable profit
margin over the study period.
Chart IV.T
Trend Line Showing Comparison between P_SAL of Small Size Firms, Medium Size Firms
and Large Size Firms
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
-0.8
-1
-1.2
-1.4
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
182
Chapter IV
N
43
43
43
43
43
43
43
Minimum
-.280
-7.645
.060
.277
-.905
-.174
.009
Maximum
.179
2.239
.894
235.270
1.945
.463
.759
Mean
.054
-.055
.432
9.893
1.154
.014
.113
Std. Deviation
.075
1.240
.202
3.621
.768
.109
.150
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The correlation matrix of small size firms shows (see table IV. 81) that VOL
has significant negative correlation (-0.35) with P_TASSET, while GROW (0.35)
and SIZ (0.37) have significant positive correlation with P_TASSET. With regard to
P_SAL, CAPINS has highly significant negative correlation (-0.92) with P_SAL and
SIZ has significant positive correlation (0.34) with P_SAL.
The regression result shows (see table IV. 82) that SIZ has highly significant
co-efficient (0.04) with P_TASSET in model 2 after removing the effects of CAPINS
and VOL. On the other hand, GROW has a significant negative coefficient (-0.16)
with P_TASSET in model 2, which indicates that the small size firms use their
assets ineffectively for increasing P. CAPINS has highly significant negative
coefficient with P_SAL in models 1 (-0.03) & 2 (-0.03), and SIZ has significant
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
183
Chapter IV
negative coefficient with (-0.28) P_SAL in model 2, indicating that as the sales
increases they earn a profit with lesser margin or the small size firms increase their
sales by reducing their profit margin. The Adj-R2 value is very low in cases of
P_TASSET (models 1 (0.19) & 2 (0.22)), indicating that model fits poorly for
P_TASSET in case of small size firms. On a contrary, Adj-R2 value is good in case of
P_SAL (models 1 (0.85) & 2 (0.86)), indicating that the regression model fairly fits
for P_SAL. The F-Stat in all the cases is highly significant, indicating that the
variance in predictor variables is related to the variance in the dependent variable.
Table IV. 81
Correlation Matrix of Determinants of P of Small Size Firms of Food Industry in
India
Variables P_TASSET P_SAL
P_TASSET
1
P_SAL
VOL
SIZ
GROW
VOL
CAPINS
GROW
CAPINS
AIP
SIZ
AIP
.370*
(.02)
.351*
(.02)
-.353*
(.02)
-.916**
(.00)
.335*
(.02)
1
.508**
(.00)
-.508**
(.00)
1
.417**
(.00)
1
-.370*
(.02)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
184
Chapter IV
Table IV. 82
Results of Regression on Determinants of P of Small Size Firms of Food Industry in
India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The Kaiser-Meyer-Olkin measure (see table IV. 83) is lesser than 0.60 (0.52)
indicating that the factor analysis result may give only illusionary picture, however
the Bartletts test 2 value (135.44) is highly significant, supporting for conduct of
factor analysis, hence factor analysis (see table IV. 84) is conducted and P_SAL, and
CAPINS converge to form factor 1. Factor 2 constitutes P_TASSET, VOL, and
GROW; and factor 3 constitutes AIP, and SIZ showing the interrelation between
variables grouped as one factor.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
185
Chapter IV
Table IV. 83
KMO and Bartlett's Test of Determinants of P of Small Size Firms of Food Industry in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
.520
Bartlett's Test of
Approx. Chi-Square
135.442
Sphericity
df
21
Sig.
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Table IV. 84
Factor Analysis of Determinants of P of Small Size Firms of Food Industry in India
Factor
Eigen value
Factor 1
2.608
Factor 2
1.715
Factor 3
1.106
Variable
convergence
P_SAL
Factor
loadings
.965
CAPINS
P_TASSET
VOL
GROW
AIP
SIZ
-.950
.773
-.763
.701
.936
.682
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
186
Chapter IV
while AIP has highly significant negative correlation (-0.55) with P_SAL, indicating
that higher the proportion of current asset in their asset structure, the lower will be
their profit margin, hence, effective employment of capital on fixed asset would help
to improve profit margin. These contradictory inferences are because they have
sacrificed their profit margin to have a higher turnover.
Table IV. 85
Descriptive Statistics of Determinants of P of Medium Size Firms of Food Industry
in India
Variables
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
N
31
31
31
31
31
31
31
Minimum Maximum
-.091
.235
-.020
.259
.138
.826
.154
4.003
1.603
2.686
-.054
.422
.009
.234
Mean
.098
.087
.503
.953
2.292
.131
.062
Std. Deviation
.060
.079
.165
.850
.217
.105
.058
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The multiple regression result, on the other hand, shows (see table IV. 87)
that GROW has highly significant coefficients with P_TASSET (models 1 (0.29) &
2 (0.30)), SIZ has significant coefficient (0.09) with P_TASSET in model 2. The adjR2 value (0.34 in model 1 and 0.35 in model 2) shows that the regression model fits
to the extent of 30% in case of P_TASSET. With regard to P_SAL, CAPINS has
highly significant positive coefficient (model 1 (0.07) & 2 (0.07)) with P_SAL. Thus,
the intensity of capital investment in production process is one of the major
determinants of the profit margin in medium size firms. SIZ has a significant
positive coefficient with P_SAL (0.11 in model 1 & 0.10 in model 2 after removing
AIP and VOL). The adj-R2 value is about 60% (0.58 in model 1 and 0.60 in model
2), indicating that the regression model fits the medium size firms about 60%. F-stat
value is highly significant in both the models of P_TASSET and P_SAL.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
187
Chapter IV
Table IV. 86
Correlation Matrix of Determinants of P of Medium Size Firms of Food Industry in
India
Variables
P_TASSET
P_SAL
P_TASSET
1
.513**
(.00)
AIP
CAPINS
P_SAL
AIP
SIZ
GROW
VOL
1
-.548**
(.00)
.744**
(.00)
1
-.593**
(.00)
SIZ
GROW
CAPINS
1
1
.516**
(.00)
VOL
1
-.406*
(.02)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The Kaiser-Meyer-Olkin measure (see table IV. 88) is (0.38) discouraging the
conduct of factor analysis. However, the 2 value (88.42) of Bartletts test is highly
significant, indicating that the correlation matrix is not an identity matrix, hence
factor analysis is run. CAPINS, P_SAL, and AIP are grouped into factor 1(see table
IV. 89). Factor 2 constitutes SIZ and VOL, and factor 3 constitutes GROW and
P_TASSET, indicating the interrelation among the variables constituting the factors.
188
Chapter IV
Table IV. 87
Results of Regression on Determinants of P of Medium Size Firms of Food Industry
in India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Table IV. 88
KMO and Bartlett's Test of Determinants of P of Medium Size Firms of Food
Industry in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.375
88.423
21
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
189
Chapter IV
Table IV. 89
Factor Analysis of Determinants of P of Medium Size Firms of Food Industry in
India
Factor
Eigen value
Factor 1
2.452
Factor 2
1.705
Factor 3
1.309
Variable
convergence
CAPINS
P_SAL
AIP
SIZ
VOL
GROW
P_TASSET
Factor
loadings
.907
.886
-.799
.834
-.806
.912
.797
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
N
12
12
12
12
12
12
12
Minimum Maximum
.051
.431
.011
.269
.225
.796
.227
2.102
2.684
3.677
.057
.381
.012
.111
Mean
.154
.113
.604
.733
2.984
.182
.043
Std. Deviation
.108
.092
.183
.543
.284
.108
.029
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
190
Chapter IV
The correlation matrix of large size firms show (see table IV. 91) that
GROW has insignificant negative correlation with P_TASSET (-0.31) and P_SAL (0.50 significant at 10% level). Thus, GROW may not contribute to increase the P in
case of large size firms. CAPINS has highly significant positive correlation (0.81)
with P_SAL as that of the medium size firms while AIP has highly significant
negative correlation (-0.77) with P_SAL. Thus, the intensity of capital employment
as fixed asset, used for production purpose, increases the profit margin of large size
firms as that of the case in medium size firms.
Table IV. 91
Correlation Matrix of Determinants of P of Large Size Firms of Food Industry in
India
Variables P_TASSET P_SAL
P_TASSET
1
P_SAL
AIP
CAPINS
AIP
SIZ
GROW
VOL
1
-.765
1
(.00)
.808 -.625
(.00) (.03)
SIZ
GROW
CAPINS
1
1
.585
(.04)
VOL
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Regression results of large size firms show (see table IV. 92) that AIP has
significant negative coefficient (-0.50) with P_TASSET in model 2 after removing
the variables SIZ, GROW, VOL. The adj-R2 value is increased from 0.15 in model 1
to 0.31 in model 2 after removing these variables. However, the problem of
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
191
Chapter IV
multicolinearity is high, and thus the value of adj-R2 value is very low when
compared to R2 values of both the models. CAPINS has significant positive
coefficient (0.10) with P_SAL in model 1; highly significant positive coefficient with
P_SAL (0.09) in model 2, indicating that even large size firms have to strive hard to
invest in fixed assets to improve their profit margin. VOL also has significant
positive coefficient (1.14) with P_SAL. The adj-R2 value is above 80% in both the
models of P_SAL (0.80 in model 1 and 0.83 in model 2 after removing SIZ and
GROW), indicating that the model is 80% fit and the predictor variables in this
model determine P_SAL above 80%. The F-stat value is highly significant in models
1 ((.94) & 2 (18.60).
Table IV. 92
Results of Regression on Determinants of P of Large Size Firms of Food Industry in
India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
192
Chapter IV
The Kaiser-Meyer-Olkin measure (see table IV. 93) shows a low value 0.43,
which is less than the acceptable level (0.60), hence the factor analysis may give only
illusionary results. However, Bartletts Test of sphericity shows a highly significant
2 value (49.28), hence, the factor analysis is run. P_SAL, CAPINS, AIP, GROW,
and VOL constitutes factor 1, and P_TASSET and SIZ constitute factor 2,
indicating high level of interrelation among the variables constituting a factor (see
table IV. 94).
Table IV. 93
KMO and Bartlett's Test of Determinants of P of Large Size Firms of Food Industry
in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.425
49.275
21
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Table IV. 94
Factor Analysis of Determinants of P of Large Size Firms of Food Industry in India
Factor
Eigen value
Factor 1
3.453
Factor 2
1.364
Variable
convergence
P_SAL
CAPINS
AIP
GROW
VOL
P_TASSET
SIZ
Factor
loadings
.934
.875
-.837
-.635
.524
.784
.769
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
193
Chapter IV
firms with profit > Rs.10 crore but < Rs.50 crore; high income size firms with
income >Rs.50 crore. The average income (PBITD) for the period of 10 years under
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The trend analysis of P_SAL shows (see chart IV.V) that the low income size
firms follow differential profit margin policy and their profit margin keeps on
fluctuating as that of small size firms (see chart IV.N). The trend line of medium
income size firms and high income size firms has steady P_SAL, indicating their
stable profit margin policy.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
194
Chapter IV
Chart IV.V
Trend Line Showing Relation between P_SAL of Low Income Size Firms, Medium
Income Size Firms and High Income Size Firms
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
-0.8
-1
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
195
Chapter IV
result of large size firms (which showed a highly significant positive correlation).
Hence, the risk factor associated with the intensive employment of capital in asset is
taken into consideration in case of low income size firms. The SIZ has significant
positive correlation (0.29) with P_SAL.
Table IV. 95
Descriptive Statistics of Determinants of P of Low Income Size Firms of Food
Industry in India
Variables
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
N
54
54
54
54
54
54
54
Minimum
-.280
-7.644
.060
.154
-.905
-.174
.009
Maximum
.179
2.239
.894
235.270
2.457
.463
.759
Mean
.053
-.046
.473
7.911
1.367
.036
.104
Std. Deviation
.071
1.103
.196
3.247
.812
.120
.139
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The regression result shows (see table IV. 97) that VOL has significant
negative coefficient (-0.17) with P_TASSET in models 1 & 2 (-0.18) after removing
the impact of predictor variables CAPINS and GROW. However, the adj-R2 value is
very low (0.17 in models 1 and 0.18 in model 2), indicating that the regression
model poorly fits in case of P_TASSET of low income size firms. CAPINS has
highly significant negative coefficient with P_SAL in models 1 (-0.03) and 2 (-0.03),
which is contrary to the results of medium size and large size firms (which has
highly significant positive coefficient). SIZ has a significant negative coefficient with
P_SAL in model 2 (-0.23) after removing the variables GROW and VOL, hence the
low income size firms, adopt a policy of low profit margin to increase their turnover.
The results of medium size firms, on the other hand, had positive coefficient,
indicating that after getting established they rise their profit margin. The adj-R2
value is very high in both the models with P_SAL (0.85 in model 1 and 0.86 in
model 2), showing a good model fit and the F-stat value is also highly significant,
indicating the significance of the model.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
196
Chapter IV
Table IV. 96
Correlation Matrix of Determinants of P of Low Income Size Firms of Food
Industry in India
Variables
P_TASSET
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
P_SAL
AIP
1
-.912**
CAPINS
(.00)
SIZ
GROW
VOL
.287*
.292*
.599**
-.488**
(.03)
(.03)
(.00)
(.00)
.338*
.279*
.437**
(.012)
(.04)
(.00)
-.381**
-.327*
(.00)
(.012)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The Kaiser-Meyer-Olkin measure (see table IV. 98) is only 0.54, which is not
encouraging the model fit. The Bartletts test of sphericity is highly significant and
so factor analysis (see table IV. 99) is conducted, predictor variables P_SAL and
CAPINS constitute factor 1. Factor 2 constitutes AIP and SIZ while factor 3
constitutes P_TASSET, VOL, and GROW.
197
Chapter IV
Table IV. 97
Results of Regression on Determinants of P of Low Income Size Firms of Food
Industry in India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Table IV. 98
KMO and Bartlett's Test of Determinants of P of Low Income Size Firms of Food
Industry in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.542
176.240
21
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
198
Chapter IV
Table IV. 99
Factor Analysis of Determinants of P of Low Income Size Firms of Food Industry in
India
Factor
Eigen value
Factor 1
2.635
Factor 2
1.726
Factor 3
1.108
Variable
convergence
P_SAL
CAPINS
AIP
SIZ
P_TASSET
VOL
GROW
Factor
loadings
.972
-.947
.914
.783
.825
-.760
.590
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
N
22
22
22
22
22
22
22
Minimum Maximum
.051
.235
.011
.293
.138
.826
.227
4.003
1.945
2.947
.018
.422
.010
.120
Mean
.115
.116
.478
1.195
2.408
.148
.047
Std. Deviation
.048
.0788
.197
.985
.259
.104
.031
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
199
Chapter IV
The correlation matrix of medium income size firms shows (see table IV.
101) that GROW has a significant positive correlation (0.49) with P_TASSET, VOL
also has a significant positive correlation (0.49), indicating that medium income size
firms are risk bearing firms and their P increase with the extent of risk borne by
these firms though it increases VOL. AIP has a highly significant negative
correlation (-0.67) with P_SAL, indicating that lesser investment in current assets
increases the profit margin of the firms. CAPINS has a highly significant positive
correlation (0.80) with P_SAL, and SIZ has a highly significant negative correlation
(-0.76) with P_SAL. Thus, these firms reduce their profit margin to increase sales
unlike the fact in case of low income size firms, which shows a significant positive
correlation with P_SAL as they tend to maintain profit margin to survive. They
dont reduce the margin to boost sales, however, the medium income size firms,
which have a reasonable level of income, bear the risk of reducing the profit margin
to enhance the sales volume.
Table IV. 101
Correlation Matrix of Determinants of P of Medium Income Size Firms of Food
Industry in India
Variables
P_TASSET
P_TASSET
1
P_SAL
-.670
(.00)
.797
(.00)
-.759
(.00)
CAPINS
SIZ
VOL
AIP
CAPINS
SIZ
GROW
VOL
AIP
GROW
P_SAL
1
-.630
(.00)
.636
(.00)
.488
(.02)
.488
(.02)
1
-.656
(.00)
1
1
-.429
(.04)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
200
Chapter IV
The regression result shows (see table IV. 102) that CAPINS has highly
significant negative coefficient with P_TASSET in models 1 (-0.04) & 2 (-0.04) after
removing VOL. As the sales increases, the ROA decreases. The adj-R2 value is above
60% (0.60 in model 1 and 0.60 in model 2), proving that the predictor variables
could determine P_TASSET upto 60%. CAPINS has highly significant positive
coefficient with P_SAL in both the models (0.05 in model 1 and 0.05 in model 2).
The adj-R2 value of both the models of P_SAL is good (0.70 in model 1 and 0.72 in
model 2) and the regression model is 70% fit. The F-stat in the models are highly
significant, indicating that the variance in the predictor variables is related to the
variance in the dependent variables P_TASSET, and P_SAL.
Table IV. 102
Results of Regression on Determinants of P of Medium Income Size Firms of Food
Industry in India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Note: Figures in parentheses are p values;**Significant at 0.01 level;*Significant at 0.05 level.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
201
Chapter IV
The Kaiser-Meyer-Olkin measure (see table IV. 103) is nearly 0.6 (0.59),
which supports the execution of factor analysis. Bartletts Test of sphericity shows
that the 2 value (91.22) is highly significant and therefore factor analysis is
conducted for medium income size firms, which shows (see table IV. 104) that the
variables converge into two factors. Factor 1 constitutes P_SAL, SIZ, CAPINS and
AIP, while factor 2 constitutes P_TASSET, GROW and VOL.
Table IV. 103
KMO and Bartlett's Test of Determinants of P of Medium Income Size Firms
of Food Industry in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.590
91.215
21
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Eigen value
Factor 1
3.284
Factor 2
1.872
Variable
convergence
P_SAL
SIZ
CAPINS
AIP
P_TASSET
GROW
VOL
Factor
loadings
.909
-.896
.845
-.814
.935
.624
.621
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
202
Chapter IV
N
10
10
10
10
10
10
10
Minimum Maximum
.079
.431
.032
.269
.225
.789
.415
2.102
2.365
3.677
.070
.381
.013
.207
Mean
.179
.161
.537
1.028
2.964
.167
.063
Std. Deviation
.104
.0805
.186
.634
.365
.094
.058
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The correlation matrix of high income size firms shows (see table IV. 106)
that GROW has highly significant negative correlation (-0.84) with P_SAL, thus
growth in assets will no more be helpful in boosting the profit margin of high
income size firms. CAPINS has highly significant positive correlation 0.77 with
P_SAL while AIP has highly significant negative correlation (-0.79) with P_SAL.
Profit margin for high income size firms increases when the firms invest their capital
for productive purposes rather than maintaining a higher liquidity level in the form
of current assets, however, the variables are not significantly correlated with the
variable P_TASSET.
The multiple regression result shows (see table IV. 107) that CAPINS has a
significant negative coefficient with P_TASSET in models 1 (-0.20) & 2 (-0.18) after
removing the predictor variables SIZ and VOL. The adj-R2 value is also good (0.64
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
203
Chapter IV
in model 1 and 0.72 in model 2), indicating that the independent variables could
predict the dependent variable P_TASSET upto 70%. GROW has significant
negative coefficient (-0.51) with P_SAL whereas, CAPINS has significant positive
coefficient (0.06) with P_SAL, which support the finding of correlation results. The
adj-R2 value is also good (0.67 in model 1 and 0.80 in model 2), making the
regression model fit in determining the dependant variable P_SAL upto 80%. The
F- stat value is also highly significant in model 2 of P_SAL.
Table IV. 106
Correlation Matrix of Determinants of P of High Income Size Firms of Food
Industry in India
Variables
P_TASSET P_SAL
P_TASSET
1
P_SAL
AIP
CAPINS
AIP
CAPINS
GROW
VOL
1
-.792**
(.00)
.768**
(.00)
1
-.665*
(.03)
SIZ
GROW
SIZ
1
1
-.838**
(.00)
.779**
(.00)
VOL
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
204
Chapter IV
The Kaiser-Meyer-Oklin measure (see table IV. 108) is 0.55, which is about
0.6 and therefore factor analysis would give a reasonable outcome. The Bartletts test
also shows highly significant 2 value (40.26). The factor analysis result (see table
IV. 109) of high income size firms show that GROW, AIP and P_SAL converges to
form factor 1; and variables SIZ, P_TASSET, CAPINS and VOL converges to form
factor 2 to represent reasonable interrelation between the variables constituting a
factor.
Table IV. 107
Results of Regression of Determinants of P of High Income Size Firms of Food
Industry in India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
205
Chapter IV
.554
40.259
21
.007
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Eigen value
Factor 1
3.663
Factor 2
1.782
Variable
convergence
GROW
AIP
P_SAL
SIZ
P_TASSET
CAPINS
VOL
Factor
loadings
-.943
-.903
.901
.830
.739
-.734
-.552
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
206
Chapter IV
marine food, poultry & meat product, floriculture, milling products, and other
agricultural products.
The trend analysis of Sector I, Sector II and sector III shows (see chart IV.W)
that there is a high degree of fluctuation in the size of P_TASSET over the period
under study for firms grouped under all sectors, however the firms belonging to
sector III show a rising trend in their efficiency to show a good return during the
end of the period of analysis. The trend line of the sector I shows a fall in the year
2008-09, whereas sector II shows considerable rise in P_TASSET.
Chart IV. W
Trend Line Showing Comparison between P_TASSET of Firms of Sector I, Sector II and
Sector III
0.18
0.16
0.14
0.12
0.1
0.08
P_TASSET SECTOR I
0.06
P_TASSET SECTOR II
0.04
0.02
0
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The trend line shows (see chart IV. X) that sector II constitutes firms that use
varied profit margin policy as that of the low income size as well as that of the small
size firms. Sector II shows a rise in their P_SAL as they had a rising trend in
P_TASSET, whereas sector I follows a steady profit policy, and their P_SAL is quite
steady over the years of analysis.
207
Chapter IV
Chart IV. X
Trend Line Showing Relation between P_SAL of Firms of Sector I, Sector II and
Sector III
1.5
1
0.5
0
P_SAL SECTOR I
P_SAL SECTOR II
-0.5
-1
-1.5
-2
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
208
Chapter IV
N
32
32
32
32
32
32
32
Minimum Maximum
-.091
.250
-.022
.651
.204
.768
.154
24.982
-.845
3.677
-.061
.422
.013
.570
Mean
.077
.0568
.587
1.491
2.006
.099
.074
Std. Deviation
.061
.114
.122
4.434
.847
.129
.105
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
CAPINS
SIZ
GROW
VOL
AIP
-.597
(.00)
.911
(.00)
-.557
(.00)
CAPINS
SIZ
GROW
AIP
.445
(.011)
1
-.543
(.00)
.417
(.018)
.378
(.03)
1
-.676
(.00)
1
.566
(.00)
VOL
1
-.396
(.02)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
209
Chapter IV
The regression result shows (see table IV. 112) that GROW has a significant
positive coefficient with P_TASSET in model 1 (0.27*) and (0.27**) in model 2 after
removing the effects of SIZ and VOL. On the other hand, AIP has a significant
negative coefficient with P_TASSET in models 1 (-0.26*) & 2 (-0.26**) encouraging
an aggressive investment policy for firms belonging to sector I. The adj-R2 value is
low (0.27 in model 1 and 0.31 in model 2) for P_TASSET indicating that there are
other variables which could better predict P_TASSET. CAPINS has highly
significant positive coefficient with P_SAL (0.02 in model 1 and 0.02 in model 2)
and AIP has significant negative coefficient with P_SAL (-0.20 in model 1 & 2) after
removing SIZ and VOL. GROW has highly significant positive coefficient (0.18)
with P_SAL in model 2, indicating that investments in assets increases the profit
margin of the firms. Thus, sector I has high scope of growth opportunities and more
investment increases the profit margin of the firms. The adj-R2 value is high in both
the models of P_SAL (0.86 in model 1 and 0.87 in model 2), indicating that the
regression model fits 86% and the variables are the major determinants of P_SAL.
Table IV. 112
Results of Regression on Determinants of P of Firms of Sector I of Food Industry in India
Un-standardized Coefficients Beta Value
Variables
Dependent variable P_TASSET
Dependent variable P_SAL
Model 1
Model 2
Model 1
Model 2
(Constant)
.197
.212
.130
.124
(0.01)
(0.00)
(0.05)
(0.01)
AIP
-.258*
-.264**
-.201*
-.199*
(0.014)
(0.00)
(0.02)
(0.015)
CAPINS
-.004
-.004
.021**
.022**
(0.28)
(0.08)
(0.00)
(0.00)
SIZ
.004
-.003
(0.83)
(0.85)
GROW
.267*
.267**
.184*
.175**
(0.011)
(0.00)
(0.03)
(0.01)
VOL
.036
.001
(0.72)
(0.98)
R2 2
0.383
0.380
0.878
0.878
Adj-R
0.265
0.314
0.855
0.865
F Stat
3.234*
5.725**
37.581**
67.336**
(0.02)
(0.00)
(0.00)
(0.00)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
210
Chapter IV
The Kaiser- Meyer- Oklin test (see table IV. 113) has a value above 0.60
(0.63) and therefore the conduct of factor analysis is acceptable. The Bartletts test
also shows highly significant 2 value (130.17) and so factor analysis is run. P_SAL,
CAPINS, AIP and SIZ converge to form factor 1(see table IV. 114). Factor 2
constitutes VOL and GROW. And factor 3 constitutes P_TASSET, showing that the
dependent variable does not have much of interrelation with the other variables.
Table IV. 113
KMO and Bartlett's Test of Determinants of P of Firms of Sector I of Food Industry
in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.626
130.170
21
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Eigen value
Factor 1
3.138
Factor 2
1.664
Factor 3
1.062
Variable
convergence
P_SAL
CAPINS
AIP
SIZ
VOL
GROW
P_TASSET
Factor
loadings
.957
.935
-.736
-.677
-.898
.648
.947
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
211
Chapter IV
earning good profit. The CAPINS value also shows a high degree of standard
deviation indicating the varied investment policy followed by firms in sector II. The
other variables, however, comparatively show a lesser standard deviation.
Table IV. 115
Descriptive Statistics of Determinants of P of Firms of Sector II of Food Industry in
India
Variables
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
N
30
30
30
30
30
30
30
Minimum
-.015
-7.645
.115
.317
-.905
-.066
.009
Maximum
.431
.293
.808
235.270
3.385
.463
.289
Mean
.101
-.138
.398
9.902
1.976
.093
.063
Std. Deviation
.086
1.421
.181
4.264
.925
.122
.056
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The correlation matrix of sector II shows (see table IV. 116) that SIZ has
highly significant positive correlations with P_TASSET (0.67) and with P_SAL
(0.61). CAPINS has highly significant negative correlation (-0.99) with P_SAL while
the other predictor variables have insignificant correlation with the two dependent
variables.
The regression results of sector II show (see table IV. 117) that SIZ has
highly significant coefficients with P_TASSET in both the models (0.09 in models 1
& 2 after removing the predictor variables GROW and VOL). The Adj-R2 value is
about 40% (0.44 in model 1 and 0.47 in model 2), indicating that the regression
model fits to about 40%. CAPINS has a significant negative coefficient with P_SAL
in both the models (-0.03 in models 1& 2 after removing SIZ and GROW). AIP also
has high significant negative coefficient with P_SAL in both the models (-0.43 in
model 1and -0.42 in model 2).
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
212
Chapter IV
P_TASSET P_SAL
1
P_SAL
CAPINS
SIZ
GROW
VOL
AIP
CAPINS
SIZ
AIP
.669**
(.00)
-.996**
(.00)
.606**
(.00)
1
.402*
(.02)
GROW
-.621**
(.00)
1
.394*
(.03)
VOL
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The Kaiser-Meyer-Olkin measure (see table IV. 118) is only 0.53, which does
not support to conduct of factor analysis, however the Bartletts test 2 value
(182.31) is highly significant, hence the correlation matrix is not an identity matrix
and so factor analysis can be carried out. The factor formation shows (see table IV.
119) that P_SAL and CAPINS converge to form factor 1. P_TASSET, SIZ, GROW
converge to form factor 2. Factor 3 comprises of the variables VOL and AIP.
213
Chapter IV
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
.526
182.312
21
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
214
Chapter IV
Eigen value
Factor 1
3.006
Factor 2
1.247
Factor 3
1.076
Variable
convergence
P_SAL
CAPINS
P_TASSET
SIZ
GROW
VOL
AIP
Factor
loadings
.981
-.971
.711
.710
.705
.860
-.590
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
215
Chapter IV
N
24
24
24
24
24
24
24
Minimum Maximum
-.280
.235
-.379
2.239
.060
.894
.337
49.051
-.413
2.804
-.174
.316
.009
.759
Mean
.071
.167
.446
4.956
1.373
.037
.127
Std. Deviation
.100
.471
.229
1.020
.823
.122
.166
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
AIP
CAPINS
VOL
VOL
CAPINS
GROW
GROW
AIP
SIZ
SIZ
1
.491
(.015)
.585
(.00)
-.629
(.00)
.639
(.00)
1
.676
(.00)
1
-.486
(.016)
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
216
Chapter IV
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The Kaiser-MeyerOlkin test (see table IV. 123) shows that the factor
analysis may give only tentative result. But the Bartletts test (see table IV. 124) has
highly significant 2 value, indicating that the correlation matrix is not an identity
matrix and factor analysis shall be conducted. The factor analysis formation shows
that P_TASSET, GROW, SIZ, VOL and CAPINS are interrelated and can be
grouped as factor 1. Factor 2 constitutes P_SAL and AIP.
217
Chapter IV
.490
71.585
21
.000
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
Eigen value
Factor 1
3.032
Factor 2
1.430
Variable
convergence
P_TASSET
GROW
SIZ
VOL
CAPINS
P_SAL
AIP
Factor
loadings
.876
.827
.770
-.694
-.452
.855
-.698
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
IV.26 Conclusion
IV.26.1 Overall Analysis
The overall result of equation II, which aims at finding out the determinants
of P in food industry shows that the GROW and SIZ have highly significant positive
correlation with P_TASSET while VOL has highly significant negative correlation
with P_TASSET, hence the hypotheses Ho17, and Ho18 are rejected, and hypotheses
Ho15 and Ho16 are accepted in case of P_TASSET. On the other hand, CAPINS has
a significant negative correlation with P_SAL which coincides with the results of
Ghemawat and Caves (1986)89, while SIZ has significant positive correlation with
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
218
Chapter IV
P_SAL, thus the hypotheses Ho16 is rejected and the hypotheses Ho15, Ho17, Ho18 are
accepted. The summary of the findings of the determinants of P is given in table IV.
125.
IV.26.2 Sales Size Wise Analysis
The size wise analysis shows different results because SIZ, and GROW have
significant positive correlation with P_TASSET in case of small size firms while
VOL has significant negative correlation with P_TASSET. CAPINS has a significant
negative correlation with P_SAL while SIZ has a significant positive correlation
with P_SAL, thus the hypotheses Ho17, and Ho18 are rejected in case of P_TASSET
while, hypotheses Ho16 is rejected in case of P_SAL.
Table IV.125
Summary of Overall Results of the Determinants of P
Hypotheses
Ho15 = There is no significant
relationship between aggressive
investment policy and
profitability.
Ho16 = no significant
relationship between capital
intensity and profitability.
Ho17 = There is no significant
relationship between volatility
and profitability.
Ho18= There is no significant
relationship between growth
and profitability.
P_TASSET
P_SAL
Accepted
Accepted
Accepted
+ve**
Rejected
-ve**
Rejected
Accepted
+ve**
Rejected
Accepted
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The correlation analysis result of medium size firms show that GROW has a
significant correlation with P_TASSET. SIZ, on the contrary, it has a highly
significant negative relation with P_SAL, which proves that they have sold the
products with low profit margin to increase the turnover. This explains why
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
219
Chapter IV
CAPINS has a significant positive correlation with P_SAL unlike in the findings of
small size firms. AIP has a significant negative correlation with P_SAL. GROW has
a highly significant negative correlation with P_SAL in case of large size firms
proving that they can use the assets effectively only to certain extent. CAPINS has a
significant positive correlation with P_SAL and AIP has significant negative
correlation with P_SAL for the medium size firms and large size firms. The
summary of the findings of sales size-wise analysis is given in table IV. 126.
Table IV.126
Summary of Sales Size-wise Analysis of the Determinants of P
Hypotheses
Ho15 = There is no
significant relationship
between aggressive
investment policy and
profitability.
Ho16 = There is no
significant relationship
between capital intensity
and profitability.
Ho17 = There is no
significant relationship
between volatility and
profitability.
Ho18= There is no
significant relationship
between growth and
profitability.
Accepted
Accepted
Accepted
-ve**
Rejected
Accepted
-ve**
Rejected
Accepted
-ve*
Rejected
Accepted
+ve**
Rejected
Accepted
+ve**
Rejected
-ve*
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
+ve*
Rejected
Accepted
+ve*
Rejected
Accepted
Accepted
Accepted
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
220
Chapter IV
P_SAL.
The high income size firms result shows that GROW has highly significant
negative correlation with P_SAL, showing that the firms cannot effectively use asset
after certain level. CAPINS has a significant positive correlation with P_SAL while
AIP has significant negative correlation with P_SAL. These findings lead to
rejection of Ho19 that there is no significant influence of size in deviating the
relationship between the predictor variables and profitability of the firms. The
summary of the results of income size-wise analysis is given in table IV. 127.
IV.26.3 Sector-wise Analysis
The sector wise analysis shows that CAPINS has a significant positive
correlation with P_SAL while SIZ and AIP have significant negative correlation
with P_SAL in sector I. However, GROW has significant positive correlation with
P_TASSET. The analysis of sector II shows that SIZ has significant positive
correlation with P_TASSET and P_SAL whereas, CAPINS has significant negative
correlation with P_SAL. The analysis of sector III shows that SIZ, and GROW have
significant positive correlation with P_TASSET while VOL has a significant
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
221
Chapter IV
negative correlation with P_TASSET which fact is similar to that of the small size
firms although there are no significant predictor variables influencing P_SAL. The
relation between the predictor variables and P has differed in respect of sectors to
which they belong to, and hence, the hypothesis Ho20 is rejected (see table IV. 128).
Table IV.127
Summary of Income Size-wise Analysis of the Determinants of P
Hypotheses
15
Ho = There is no
significant
relationship between
aggressive
investment policy
and profitability.
Ho16 = There is no
significant
relationship between
capital intensity and
profitability.
Ho17 = There is no
significant
relationship between
volatility and
profitability.
Ho18= There is no
significant
relationship between
growth and
profitability.
P_TASSET
P_SAL
Accepted
Accepted
Accepted
Accepted
-ve**
Rejected
-ve**
Rejected
+ve*
Rejected
P_TASSET
P_SAL
-ve**
Rejected
Accepted
-ve**
Rejected
Accepted
+ve*
Rejected
Accepted
+ve**
Rejected
Accepted
+ve*
Rejected
Accepted
Accepted
Accepted
Accepted
+ve*
Rejected
Accepted
Accepted
-ve**
Rejected
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
222
Chapter IV
Table IV.128
Summary of Sector-wise Analysis of the Determinants of P
Hypotheses
Ho15 = no significant
relationship between
aggressive investment
policy and profitability.
Ho16 = no significant
relationship between
capital intensity and
profitability.
Ho17 = no significant
relationship between
volatility and
profitability.
Ho18= no significant
relationship between
growth and
profitability.
Sector I Firms
P_TASSET P_SAL
Sector II Firms
P_TASSET P_SAL
Accepted
-ve**
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
+ve**
Rejected
Accepted
-ve**
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
-ve**
Rejected
Accepted
+ve*
Rejected
Accepted
Accepted
Accepted
+ve**
Rejected
Accepted
223
Chapter IV
contrary as the size of the firm increases. The medium income size firms show that
P has positive coefficient with LEV while high income size firms show that P has
significant negative coefficient with LEV. So, as their size increases, they use retained
earnings and rely less on external borrowings. The equation I regression model fits
over 80% in case of high income size firms indicating that the explaining variables
determines the variance in LEV over 80%. There are various factors influencing the
LEV of different sectors.
intensive use of capital for production purpose will increase the profit margin of the
firms. But CAPINS shows a positive correlation with P_SAL in case of medium
size, large size, medium income size and high income size firms which is supported
by a negative relation between SIZ and P_SAL. This fact shows that these firms
have increased their sales by reducing their profit margin, which fact proves the
positive relation between CAPINS and P_SAL indicating that the profit has
decreased with intensive use of asset for increasing sales.
224
Chapter IV
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Chapter IV
73
229