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Determinants of Capital Structure in the Indian Pharma Sector

April Bhattacharjee and Mihir Dash ()
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April Bhattacharjee: Tata Consultancy Services, India

Journal of Applied Management and Investments, 2018, vol. 7, issue 3, 125-131

Abstract: This study analyses the determinants of capital structure in the Indian pharma sector using pooled regression and panel regression modeling. The results of the study suggest that financial leverage in Indian pharma companies is determined primarily by two factors: it is positively related with Non-Debt Tax Shield and negatively related with Profitability. Paradoxically, the former finding supports the Static Trade-Off theory, as companies would prefer debt financing due to its tax benefits, while the latter finding supports the Pecking Order theory, as more profitable companies would prefer internal sources of funds. This could mean that pharma companies would prefer to finance their initial capital expenditure through debt due to its tax advantage, but as they become more profitable they prefer to turn to internal sources. This switch-over behaviour, whereby companies would be expected to switch from financing through debt to retained earnings, should be investigated in further detail, in the pharma sector and in other capital-intensive industries.

Keywords: capital structure; pharma sector; Static Trade-off Theory; Pecking Order Theory (search for similar items in EconPapers)
JEL-codes: G32 L65 (search for similar items in EconPapers)
Date: 2018
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