The Effect of Macroeconomic Variables on the Capital Structure Decisions of Indian Firms: A Vector Error Correction Model/Vector Autoregressive Approach

Sakshi Khanna, Amit Srivastava and Yajulu Medury
Additional contact information
Sakshi Khanna: Department of Humanities and Social Sciences, Jaypee University of Information Technology, Waknaghat, Solan, Himachal Pradesh, India,
Amit Srivastava: Department of Humanities and Social Sciences, Jaypee University of Information Technology, Waknaghat, Solan, Himachal Pradesh, India
Yajulu Medury: Bennett Coleman and Co. Ltd., New Delhi, India.

International Journal of Economics and Financial Issues, 2015, vol. 5, issue 4, 968-978

Abstract: This paper sheds light on how the macroeconomic variables affect the capital structure decisions in context to the equity market timing theory, for the firms of an emerging economy - India. The analysis is done through analytical and causal research design using vector error correction model/vector autoregressive model. Further, the effect is also analyzed when the firms are categorized into the varied sectors of economy - Primary, secondary and tertiary. The period for the study is from the year 1992 to 2013. The results show that changes in macroeconomic environment cause changes in the firm's choice of finance both in long-run as well as in short-run. The analysis shows that for primary sector firms, leverage is pro-cyclical; secondary sector firms imply a counter-cyclical leverage and for tertiary sector firms equity is pro-cyclical. Therefore, the managers must identify the windows of opportunity depending upon the sector to which the firms belong to.

Keywords: Capital Structure Decisions; Equity Market Timing Theory; Vector Error Correction Model/Vector Autoregressive Model; Macroeconomic Variables (search for similar items in EconPapers)
JEL-codes: E00 G10 G3 G30 G32 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.econjournals.com/index.php/ijefi/article/download/1450/pdf (application/pdf)
http://www.econjournals.com/index.php/ijefi/article/view/1450/pdf (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eco:journ1:2015-04-16

Access Statistics for this article

International Journal of Economics and Financial Issues is currently edited by Ilhan Ozturk

More articles in International Journal of Economics and Financial Issues from Econjournals
Bibliographic data for series maintained by Ilhan Ozturk ().