IPASJ International Journal of Management (IIJM)

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Volume 5, Issue 9, September 2017 ISSN 2321-645X

AN EMPIRICAL STUDY ON THE CAPITAL

STRUCTURE OF OIL AND GAS
COMPANIES IN INDIA
Shalini R1 , Mohua Biswas2
1
Research Scholar Bharathiar University Coimbatore
2
Research Supervisor Bharathiar University Coimbatore

Abstract
This paper attempts to examine the firm specific factors which determine the capital structure decisions of publicly traded oil
and gas companies of India. Based on the market capitalization, top five oil and gas companies listed in BSE are selected.
Using multi regression model, accounting data of companies over a period of 10 years from 2007-2016 is chosen and the
empirical study is conducted. Firm specific factors such as tangibility, firm size, liquidity, non debt tax shield, growth rate and
profitability have been analyzed to check their influence on the leverage structure of the selected oil and gas companies in
Indian context. Total debt leverage is taken as dependent variable and firm specific factors are taken as independent variables.
It has been found from the study that growth rate and firm size are statistically significant determinants of capital structure of
the listed oil and gas companies.
Key words: Capital structure, leverage, tangibility, liquidity, firm size, profitability
JEL classification: G32

1. INTRODUCTION
Capital structure refers to the mix of different securities known as debt equity ratio in a corporate firm. Capital
structure decisions are considered to be one of the most crucial decisions of a company as it has a direct bearing on the
success or failure of the company. A number of theories have been proposed and lot of research has been done in the
past few decades on the capital structure decisions and the factors which influence them. This topic acquired special
significance after the publication of seminal papers by Modigliani and Miller (1959, 1963). But neither the research
nor the theory has been able to provide satisfactory explanation as to what factors affect the capital structure decisions
(Brealey and Myers 1991).
Extensive research has been conducted on developed markets whereas emerging economies is still deficient of such
meticulous investigation. There have been quite a few significant papers conducted on country-to-country comparisons
(De Jong et al., 2008; Rajan and Zingales, 1995; Booth et al., 2001). Researchers like Bhaduri (2002), Harvey et al
(2004) etc have focused on a few European and Asian countries. Bhaduri has conducted research specific to India with
highly significant results but chose a limited number of variables and small sample due to limitation of data.
Theoretical papers in this field have been even rarer.

Several researchers including Mitton(2006), have already exposed the tendency of convergence between emerging
markets and developed economies. The emerging markets are steadily reaching the debt levels of developed countries.
It would be convenient if the finding of the developed markets research when dealing with any capital structure
problems is applied on emerging markets. However, the matter is not as straightforward as that seems to be. It is crucial
to be sure that the companies, operating in emerging or developed capital market, actually follow the worldwide
tendencies and that they choose their capital structure following the same logic. Alves and Ferreira (2007); La Porta et
al (1998, 2000) and several others argued that the determinants of Capital Structure are significantly affected by
jurisdictional factors like Corporate and Personal Tax System, Corporate Governance, Laws and Regulations of the
country. Similarly, the development of the bond/capital markets, Rule of Law, Credit/Share holders Protection, etc, are
quite specific to individual countries. It is therefore, very important to study individual emerging countries by
themselves rather than the countries pooled together. Due to the uniqueness of India as a country, it is important to
understand the behaviour of the firms by studying the country individually.

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There is also limited work done specific to India related to capital structure theories and determinants (Booth (2001),
Bhaduri (2002); Singh and Kumar (2008); Farhat et al (2009),). India as an emerging economy is based on common
law with comfortable external debt environment. It has the potential for enormous expansion and the economy has
been growing significantly in recent years. Hence it becomes important for us to understand the significance of capital
structure decisions at the macro and micro level of financing. (Joy Pathak) At the same time there are several firm
specific and country specific factors which influence the capital structure decisions of publicly traded firms in India.
Hence it is extremely important for finance policy-makers at the firm or aggregate level to understand what drives
corporate financing.

2. LITERATURE REVIEW
There is a wide literature focusing on the determinants of capital structure in several countries across the world.
2.1 Financial Leverage as a dependent variable
Leverage has been defined in various ways. The definition of leverage depends on the objective of the analysis (Rajan &
Zingales, 1995). Leverage may be defined as debt to firm value, debt to total assets, debt to net assets, debt to
capitalization etc. Debt to total assets or debt to capital is the most often used leverage in empirical studies. Some
previous research studies (Titman & Wessels, 1988; Chung, 1993; Pandey el.al, 2000) use different measures of
leverage. Riyazahmed (2012) has used financial leverage as a dependent variable in his study. Sinha & Bansal (2013)
has used debt to asset ratio, incremental debt to total asset ratio and debt to capital employed ratio.
2.2 Determinants of Capital structure International evidences
Rajan & Zingales (1995) find growth, tangibility, profitability and size as the important variables in their study.
Similar results has been witnessed in Sheluntkova (2014) where size, protifability, asset structure and liquidity
influences the capital structure. Alzomaia (2014) shows the positive relationship between size, profitability and
leverage. Joshua Abor (2008) indicates that age, size, asset structure, profitability, risk and managerial ownership are
important in influencing the capital structure of Ghanian firms. Cortex & Susanto (2012) reveal that profitability,
tangibility and non debt tax ratio are statistically significant. Frank & Goyal (2007) shows that the most reliable factors
are market to book ratio, tangibility, profits, log of assets and expected inflation.
2.2 Determinants of Capital structure Indian evidences
Pathak (1997) studies six determinants of capital structure influencing the leverage of the firm. Baral (2004) shows that
size, growth rate and earning rate is statistically significant determinants of capital structure of listed companies.
Rasoolpur (2014) shows interesting result wherein uniqueness and liquidity are the important determinants of capital
structure. Riyazahmed (2012) shows that dividend payout, debt service capacity, degree of leverage and business risk
are statistically significant determinants of financial leverage. Pandey (2000) shows that profitability, size, growth, risk
and tangibility ratios have significant influence on all types of debt. Kakani & Reddy (1998) shows that profitability,
capital intensity, earnings volatility and non debt tax shield are negatively related to capital structure of the firm.
2.3 Techniques used Empirical evidences
Sinha & Bansal (2013), Pandey (2000), Sheluntkova (2014), Joshua Abor (2008), Rasoolpur (2012), Baral (2004) have
used multi regression analysis to analyse the dependent and independent variable. Picu et.al. (1999) have done a
conceptual study considering the cyclical factors affecting the capital structure. Frank & Goyal (2007) have used sign
test to analyse the factors determining the capital structure. Alzomia (2014) has used cross sectional pooled data
methodology for analyzing the capital structure determinants. Song (2005) has used fixed effect panel data regression
model due to the availability of large amount of data over a period of time. Omet et.al (2015) have used unrelated
regression analysis and panel data for their study. Cortez et.al have used multi regression and panel data to analyse the
relationship of various factors.

3. OBJECTIVES OF THE STUDY

Capital structure decision is very crucial for an organization as the composition of debt and equity have direct bearing
on the profitability of the organization. Too much of debt poses a threat of bankruptcy and too much of equity brings
down the EPS. Hence an appropriate combination of debt and equity helps an organization to excel in the market. In
this context, the determinants of capital structure and examined in this paper. So, the objective of this paper is to
examine the effect of different explanatory variables on capital structure of the select oil and gas companies in India.

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4. RESEARCH METHODOLOGY
4.1 Sources of Data
The study is descriptive and analytical in nature and focuses on thecapital structure in the selected Indian oil and gas
companies. In order to meet the objectives of the study data have beencollected from the secondary sources. For the
purpose ofanalysis, balance sheet and income statement data havebeen sourced from PROWESS databaseof CMIE.
4.2 Sample
The data have been collected fortop fiveIndian oil and gas companies listed in BSE for a period of ten years. The
selection is based on the market capitalization. Firms taken for the study are Indian Oil Corporation, Oil and Natural
Gas Corporation, Bharath Petroleum Corporation ltd, Essar Oil and Cairn India ltd.
4.3 Period of Study
The study covers a period of ten years starting from 2006-07 to 2015-16.
4.4 Statement of Hypotheses
This study has tested the following null hypotheses on relationshipbetween the defined variables and capital structure:
H01:There is no significant relationship between the growth rate and financialleverage.
H02:There is no significant relationship between tangibility and financial leverage.
H03:There is no significant relationship between the profitability andfinancial leverage.
H04:There is no significant relationship between the firm size andfinancial leverage.
H05:There is no significant relationship between the non debt tax shield and financial leverage.
H06: There is no significant relationship between liquidity and financial leverage.
4.5 Variables used in the Study
Following are the variables used in this study to testthe effect of different explanatory variables on capital structureof
firms taken in the sample. Financial leverage isa dependent variable and growth rate, tangibility, profitability, firm size
and non debt tax shield are the independent variables.
Table - 1 List of Variables in the study
Variables Definition Abbreviation Type of variables
Financial Leverage Total debt/Total Assets Fin lev Dependent
Firm Size Log of sales Size Independent
Growth rate Variation in Total assets GR Independent
Tangibility Net Fixed assets/Total assets Tang Independent
Liquidity Current assets/current liabilities Liq Independent
Profitability Net profit/ Total assets Prof Independent
Non debt tax shield Depreciation/Total assets NDTS Independent

4.6 Tools of Data Analysis

This study makes use of the statistical tools for its descriptive and quantitative analysis using IBM SPSS 20.0. The
Mean and Standard Deviation are used in the descriptive portion of the analyses to find out the mean values of each
variable and their standard deviation. In the quantitative analysis portion, a statistical Karl Pearsons correlation
analysis is made to determine the relationship between a selected independent variables and capital structure for the
sample of the study. Similarly, the multiple regression analysis is also made to assess the impact of capital structure
variables of the sample firms.

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5. ANALYSIS AND DISCUSSION OF THE STUDY

5.1 Descriptive Statistics of Capital Structure Variables
Table-2 shows the descriptive statistics of the dependent variable financial leverage and independent variables liquidity,
profitability, firm size, tangibility, non debt tax shield and growth rate.Mean and standard deviation of all the selected
variables have been calculated.

Table 2Descriptive Statistics

Mean Std. Deviation N

financial leverage 18.753702 16.25494 5

Liquidity ratio 1.059133 0.723283 5
profitability ratio 0.243637 0.353493 5
Firm size 4.645789 1.578498 5
tangibility 0.531196 0.293455 5
non-debt tax shield 0.154591 0.228314 5
growth rate 11.176742 7.849251 5

Table-2 presents the descriptive statistics of the selected capital structure variables of the oil and gas companies. An
average value of financial leverage is 18.75 crores and growth rate is 11.176 crores. Standard deviation is very high in
case of financial leverage and very low in case of non-debt tax shield.
5.2 Karl Pearsons Correlation Analysis
Correlation analysis has been applied to find out the association between dependent and independent variables in the
study. The table- 3 explains the positive and negative associations of capital structure variables.

Table 3 Pearson's Correlation Coefficients

Variables Fin. Lev Liquidity Profitability Size Tangibility NDTS Growth
Fin. lev 1 -0.232 -0.208 0.584 0.679 0.786 -0.364
Liquidity -0.232 1 0.335 -0.084 -0.145 -0.193 0.234
profitability -0.208 0.335 1 0.149 0.226 -0.14 0.417
Firm size 0.584 -0.084 0.149 1 0.651 0.263 0.392
tangibility 0.679 -0.145 0.226 0.651 1 0.708 -0.19
NDTS 0.786 -0.193 -0.14 0.263 0.708 1 -0.536
Growth rate -0.364 0.234 0.417 0.392 -0.19 -0.536 1

The above table shows the relationship between dependent and independent variables of the study. Financial leverage
has negative relationship with liquidity, profitability and growth rate of the firm. This indicates that an increase in the
percentage of these variables will reduce the percentage in the value of financial leverage. Financial leverage has
positive and very significant association with size, tangibility, and non debt tax shield. It shows that an increase in the
percentage of sales, fixed assets and depreciation will lead to an increase in financialleverage in the firm.
5.3 Multiple Regression Analysis
Multiple regression techniques have been applied to study the influence of all the explanatory variables on the capital
structure of selected oil and gas companies. In this study, liquidity, profitability, firm size, tangibility, non debt tax
shield and growth rate have been taken as the explanatory variables and financial leverage has been used as the
dependent variable.

The regression model used in the analysis is -

Fin.Lev t = a + 1LIQt + 2PROFt + 3SIZEt + 4 TANGt + 5NDTSt +6GRt +

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where:
Fin.Lev = Financial Average
a =intercept term
1 6=Regression coefficients
t = Time Period
LIQ = Liquidity
PROF= Profitability
SIZE =Size of the firm
TANG = Tangibility
NDTS = Non-Debt Tax Shield
GR= Growth Rate
= Error Term

Table 4(a) Regression Coefficients

Model Unstandardized Coefficients Standardized T Sig.
Coefficients
B Std. Error Beta
(Constant) 0.02 0.044 0.466 0.645
Liquidity ratio -0.003 0.019 -0.011 -0.151 0.881
profitability ratio 0.045 0.052 0.087 0.865 0.395
Firm size 0.088 0.019 0.758 4.534 .000
tangibility -0.171 0.12 -0.274 -1.419 0.168
non-debt taxshield 0.142 0.213 0.178 0.667 0.511
1 growth rate -1.26E-06 .000 -0.544 -4.09 .000
a. Dependent Variable: financial leverage

Table 4(b) ANOVAa

Model Sum of df Mean Square F Sig.
Squares
Regression 1.001 8 0.125 24.89 .000b
Residual 0.131 26 0.005
1 Total 1.132 34
a. Dependent Variable: financial leverage
b. Predictors: (Constant), growth rate, tangibility, Liquidity ratio, profitability ratio, Firm size, non-debt tax shield

Table 4 (c) Model Summary

Model R R Square Adjusted R Square Std. Error of the Durbin-Watson
Estimate

1 .940a 0.885 0.849 0.070901 1.968

a. Predictors: (Constant), growth rate, tangibility, Liquidity ratio, profitability ratio, Firm size, non-debt taxshield

b. Dependent Variable: financial leverage

Above Tables 4(a), (b) and (c) shows the results of regression coefficients, ANOVA, R, R-Square, and Durbin -Watson
test of the financial leverage which is the capital structure variable and its independent variables.

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B-Coefficient tests the first hypothesis. The relationship between the growth rate of the firm and financial
leverage is negative and significant (-0.544). Thus, the first hypothesis is rejected. It shows that there is a negative
relationship maintained between growth rate and financial leverage of the firm. It reveals that there is an increase
of one unit in growth rate, decreases the financial leverage of the firm during the study period.
Beta coefficient tests the second hypothesis. The relation between the tangibility and financial leverage is
negative but it is insignificant. Thus, the second hypothesis is accepted.
Beta coefficient has accepted the third hypothesis.The relation between profitability and financial leverage is
positive and insignificant. It indicates that with every increasein profitability, financial leverage also increases.
The regression coefficient has rejected the fourth hypothesis. It is positive and statistically significant.
The beta coefficient has accepted the fifth hypothesis. It is positive and statistically insignificant. The beta
coefficient has accepted the sixth hypothesis. It is negative and statistically insignificant. It indicates that there
has been no change in the financial leverage when there is a change in liquidity.

ANOVA test indicates that the possibility of predicting financial leverage. R-Square value is 88.5%. Calculated value
of ANOVA is 24.89(.000), highly significant at 1% level. It means that there is a significant relationship jointly shown
between all independent variables and financial leverage of the firms during the study period. Durbin-Watson test is
indicating (1.968) the auto correlation between the independent variables. Hence it is concluded that all the
independent variables jointly affect the financial leverage of the firm.

6. CONCLUSION
Out of six examined explanatory variables-growth rate, tangibility, profitability, size, non debt tax shield and size under
study only two variables growth rate and size are statistically significant determinants of financial leverage. These
variables explain around 89% of variation in financial leverage. The remaining variables included in the model explain
less percentage of the variation. From this it can be concluded that firm size and growth rate play a major role in the
determination of the financial leverage in the selected oil and gas companies in India.

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AUTHORS
Ms. Shalini Ris currently associated with Department of Management Studies (BU), Dayananda Sagar
College of Arts, Science and Commerce as an Assistant Professor. She is pursuing her PhD in
Bharathiar University in the areas of Finance. She has done MBA (Fin), M.Phil, PGDFM. She has
presented papers IIT-Madras, IIM-Khozikode, IISc-Bangalore and other premier institutes in India. She
has published papers in National and International journals.

Dr. Mahua Biswas is currently associated with Department of Management Studies (BU), Dayananda
Sagar College of Arts, Science and Commerce as an Associate Professor. She has earned her PhD from
Assam University (A Central University) in the year 2010. She has done MBA (Fin), M.Com, B.Com
(Hons Accy) and DISM. She is a certified SAP (FI) consultant. Her areas of research include stock
market, corporate governance, capital structure decision, forensic accounting, sustainability reporting,
credit risk management to name a few. She also has several publications to her credit in various peer
reviewed journals and contributed many papers at national and international conferences and recipient of Best Paper
Award. She has been visiting faculty of some reputed universities in India. She also has coordinated many events
including an international conference.

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