The Effect of Capital Structure on Profitability -An Empirical Analysis of Indian Paper Industry

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1 The Effect of Capital Structure on Profitability -An Empirical Analysis of Indian Paper Industry A.Vijayakumar Associate Professor of Commerce, Erode Arts and Science College, Erode, Tamil Nadu, India A.Karunaiathal Ph.D., Research Scholar in Commerce, Erode Arts and Science College, Erode, Tamil Nadu, India Abstract Financing the firm s assets is a very crucial problem in every business and as a general rule there should be a proper mix of debt and equity capital in financing firm s assets. While designing an optimal capital structure, the management has to keep in mind the objective of maximizing the value of the firm Thus, an attempt has been made in this study to find the relationship between the capital structure and profitability. The overall analysis of impact of profitability on capital structure reveals that operating profit margin, net profit margin and market price per share disclosed a positive and significant relationship with capital structure of majority of the selected companies during the study period. However, return on capital employed, return on net worth and earnings per share predicts a negative but statistically significant relationship with capital structure of majority of the selected companies during the study period. Keywords: Corporate Capital Structure, Corporate Profitability, Operating Profit, Return on Capital Employed and Indian Paper Industry. Financial management of any corporate sector revolves around three major decisions, viz., financial decisions, investment decisions and dividend decisions. Financial decisions are concerned with the sources of finance, i.e. from where finances should be raised. There are basically two sources of finance i.e. short-term and long-term. The capital structure of a company is determined by the longterm sources of finance. Pandey (2005, p.5) stated that the term capital structure is used to represent the proportionate relationship between debt and equity. A business enterprise generally procures its permanent capital in the form of long-term debt, preference shares, ordinary shares and reserves and surpluses. These are individual components, which when taken together, would constitute a company s capital structure. Thus the aim of capital structure management is the profit maximization or wealth maximization ensuring minimum cost of capital and maximum rate of return to the common shareholders. Chakraborty (1981, p.111) stated that a judicious mix of debt and equity securities would maximize the value of equity. The financial manager of corporate has to plan an optimum capital structure for the company in such a way that it gives the maximum benefits and thus maximizes the wealth of shareholders. Having determined its investment policy, a company should plan the sources of finance and their mix. Companies which do not formally plan their capital structures are likely to have uneconomical and imbalanced capital structures and could face unforgivable difficulties in raising capital on favourable terms in the long-run. Also inappropriate mix of sources of finance can render the operations of the companies inflexible. The composition of capital structure is governed by a number of factors and no uniform standard can be prescribed for all the enterprises. Sectors of industry or trade to which a particular enterprise belongs can, however, provide a broad pattern of composition. For instance, a public utility concern, such as an electricity supply company can absorb a greater proportion of borrowed funds than an enterprise in a more competitive sector of industry due to more stability in earnings in the case of former than the latter. Within these broad parameters, each IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 28

2 enterprise will have to plan its own capital structure keeping in view both its short-term requirements and long-term expansion programmes. Statement of the Problem Financing the firm s assets is a very crucial problem in every business and as a general rule there should be a proper mix of debt and equity capital in financing firm s assets. While designing an optimal capital structure, the management has to keep in mind the objective of maximizing the value of the firm Thus, an attempt has been made in this study to find the relationship between the capital structure and profitability. Based on the above facts, the researcher has probed the following question: What is the relationship between capital structure and profitability of selected large scale companies in Indian Paper Industry? Selection of sample Keeping in view of the scope of the study, it is decided to include all the large scale paper companies under Indian paper industry working before or from the year to There are 21 large scale paper companies operated in India. But, owing to several constraints such as the non-availability of financial statements or the non-working of a company in a particular year and merger and acquisition etc., it is compelled to restrict the number of sample companies to ten. The Capitaline and CMIE database publish key financial data of Indian corporate sector systematically. Hence, Capitaline and CMIE databases proved to be complimentary to finalize the sample for the study. The exhaustive list of paper industry in India from Capitaline was cross checked with CMIE database to sort out companies to fit in as the sample for the study. The comprehensive list of companies prepared from the database was modified by sorting out the firms using the following criteria; (i)those were not in operation for a year during the period of stud; (ii)those were in operation but non-availability of data for the whole study period; (iii) Those that were merged with another company during the period of study and (iv) Those that had below 50,000 MT installed capacity. The list of large paper companies selected included in the present study along with the year of incorporation, ownership pattern and its market share is presented in Table 1. It is evident from Table 1 that sample companies represent percentage of market share in the Indian paper industry. Thus, the findings based on the occurrence of such representative sample may be presumed to be true representative of paper industry in the country. Period of study The period to is selected for this study of Indian paper industry. This 13 years period is chosen in order to have a fairly, reasonably reliable and up -to-date financial data would be available. Sources of data The data required for the study have been obtained from secondary sources. The study is mainly based on secondary data. The major sources of data analysed and interpreted in this study related to all those companies selected is collected from PROWESS database, which is the most reliable and the empowered corporate database of Centre for Monitoring Indian Economy (CMIE). Besides Prowess database, relevant secondary data have also been collected from BSE Official Directory, CMIE publications, published annual reports of the companies, annual survey of industries, business news papers, Reports on Currency and Finance, Centre for Industrial and Economic Research (CIER s) Industrial Data Book, publications of the Indian Pulp and Paper Technical Association (IPPTA), Libraries of various research institutions, through internet and from official websites of the selected companies. Various journals and periodicals on finance and industry have also been reviewed. Analysis of the empirical relationship between capital structure and Profitability This part describes the empirical relationship between capital structure and profitability of the selected large scale companies in Indian paper industry during the study period. The results of empirical research have not been able to provide satisfactory agreement as to how profitability affects the capital structure of the firm. Myers suggested that firms prefer retained earnings to debt and they prefer debt rather than new equity. Classical finance theory suggests that profitable firms should have IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 29

3 higher debt levels than less profitable firms. Ramkumar et al. (1996) Jitendra Mahatud and L.M. Bhole (2003), Sudhansu Mohan et al. (2005), Debatrata Datta and Babita Agarwal (2009), Ramesh K.Singla (2006) Attaullah Shah (2007) Boopen et al. (2007) and Bidyut Jyoti and Bhattacharjee (2010) studied the impact of profitability and capital structure and found both positive and negative relationship. Thus, an attempt was made in this part to examine the relationship between debt equity and profitability of selected Indian paper industry during the study period. Many factors influence the profitability of companies. This study has been conducted choosing six independent variables and one dependent variable to analyse the relationship between capital structure and profitability ratios of the selected large scale paper companies in India. Simple regression models are used to test the theoretical relationship between the debt equity and profitability ratios. The analysis is made with the help of Statistical Package of Social Sciences (SPSS). In this study, Operating Profit (OP), Profit after tax (PAT), Return on Capital Employed (ROCE), Return on Net worth (RONW), Earnings per Share (EPS) and Market Price per Share (MPS) were used as independent variables for this purpose. This study has tested the following null hypotheses related to the defined variables of profitability of selected large scale companies in Indian paper industry. Ho: There is no significant relationship between debt equity ratio and profitability ratios of the selected companies. Debt equity ratio with operating profit An attempt has been made to examine the relationship between debt equity ratios with operating profit of selected large scale companies in the Indian paper industry over the period to The linear regression model fitted is as follows: D/E = α + β (OP) +e (i) Where, D/E - Debt equity ratio, OP - Operating profit, α, β - Parameters to be estimated (intercept and co-efficient respectively) and e - Error term. Table 2 exhibits the relationship between debt equity ratio and operating profit of the selected large scale companies in the Indian paper industry. It is inferred from Table 25 that the regression models of debt equity ratio with operating profit of the selected companies have proved to be a good fit. This is revealed from the value of R 2 (0.40) the co-efficient of determination, F value and corresponding P values. The co-efficient of determination R 2 exposes that around 58 per cent changes in the capital structure is influenced by one per cent change in the operating profit of the Indian paper industry and it is 40 per cent in the selected companies in Indian paper industry. Among the selected companies, this variation ranges from 25 per cent (Ballarpur Industries Limited) to 57 per cent (Andhra Pradesh Paper Mills Limited) during the study period. It is manifested from the empirical result that the beta co-efficient of operating profit for the Indian Paper Industry (0.01) proves a statistically positive and significant relationship between the capital structure and operating profit. On the other hand, the operating profit of sector shows a negative (-0.04) but statistically significant relationship between capital structure and operating profit. The empirical result also proclaims that the values of beta co-efficient of operating profit are positive in all the selected companies except JK Paper Mills Limited and Rama Newsprint Limited. The t- test also proves that there is a significant relationship between capital structure and operating profit at 5 per cent level of significance. Thus, the results of these companies have disproved their respective hypothesis that there is no significant relationship between capital structure and the operating profit. Hence, it is concluded that there is a significant relationship between capital structure and operating profit of majority of the selected companies during the study period. The findings of this study supports the empirical results of Jitendra Mahahud and Bhole (2003), Sudhansu (2005), Yanmin qian (2007), Mallikarjunappa (2007), Ramesh K. Singla (2007), Attaullah Shah (2007) and Gunasekaran (2008) found significant relationship between capital structure and profitability. Thus, operating profit is a IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 30

4 significant factor which affects the capital structure of the selected large scale companies in Indian paper industry. To conclude, if operating profit of the company is more, they can afford to raise finance more from debt i.e. high profitable companies have a liberty to use debt financing as and when it needs. Thus, companies with high profit can avail the advantage of flexible capital structure. Debt equity ratio with net profit margin ratio Table 3 presents the regression analysis of the second variant of profitability i.e. net profit margin of the selected large scale paper companies during the study period. The linear regression model fitted to test debt equity ratio with net profit margin is as follows. D/E = α + β (NP) + e (ii) Where, D/E - Debt equity ratio, NP - Net profit, α, β - Parameters to be estimated (intercept and co-efficient respectively) and e - Error term. It is inferred from Table 3 that the co-efficient of determination of net profit (R) 2 and the adjusted R 2 indicates that one per cent change in net profit leads to 59 per cent changes in the debt equity of the Indian paper industry. But in the sector average, it influence 36 per cent changes in debt equity ratio. Among the selected companies this variation ranges from 21 per cent (Rama Newsprint Limited) to 57 per cent (Hindustan Paper Corporation Limited). This difference between the selected companies is expected because the firms ability to raise funds and earn profit depends on many factors and these factors differ from company to company. The DW value also depicts lack of autocorrelation in the regression model of debt equity with net profit margin. The regression beta coefficient of both the industry and the large scale sector are negative, but it is statistically significant at five per cent level of significance. The analysis reveals that beta co-efficient of net profit is statistically positive in all the selected companies except Ballarpur Industries Limited, JK Paper Mills Limited and Rama Newsprint Limited during the study period. Thus, it is clear from the analysis that there is a positive and significant relationship between capital structure and net profit of most of the selected companies. The analysis of t test rejects the set hypothesis and thereby proves that there exists a significant relationship between capital structure and net profit in eight out of ten companies. Thus, the empirical result of regression analysis of debt equity with net profit depicts both positive and negative relationship. These results are consistent with the results of Syed et al (2006), Bidyut Jyoti Bhattacharjee (2010), Mihaela Dragota (2009) and Sanjay Bhayani (2010) who found a positive relationship between capital structure and net profit in their study. Rajan Zingles (1995), Wald (1999), Joshua Abor (2007) and Ying Hong Chen (2007) found a significantly negative relationship between capital structure and net profit. To conclude, net profit is a significant factor which affects the capital structure of the most of the selected large scale companies in Indian paper industry. This observation seems to be very practical because those companies which have higher profit at their disposal tend to get the benefit of cheaper source of fund, i.e. debt can increase their profitability still further because of the tax advantage. Debt equity with return on capital employed Table 4 presents the regression analysis of the debt equity with the return on capital employed of the selected large scale companies in Indian paper industry during the study period. The linear regression model fitted to test debt equity with ROCE is - D/E = α + β (ROCE) + e (iii) Where, D/E - Debt equity ratio, ROCE - Return on capital employed, α, β - Parameters to be estimated (intercept and co-efficient) and e - Error term. IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 31

5 Table 4 shows that the co-efficient of determination of return on capital employed (R 2 ) of Indian paper industry explains 51 per cent change in the debt equity ratio. But in the case of sector average, the value of R 2 is 0.41 i.e. 41 per cent changes in the debt equity ratio is explained by one per cent change in return on capital employed. It is also observed that the co-efficient of determination (R 2 ) has registered the highest value in JK Paper Mills Limited (0.70) and it was the lowest in Seshasayee Paper and Boards Limited (0.21). The result of the beta co-efficient reflects a negative impact of debt equity on return on capital employed (-0.03) of the Indian paper industry, but it is positive and statistically significant in the sector (0.01) at five per cent level of significance. Among the individual companies, it is positive in five out of ten companies, but statistically significant in all the selected companies except Seshasayee Paper and Boards Limited during the study period. This indicates that, the selected companies have both positive and negative relationship between return on capital employed and capital structure during the reference period. Thus, the result of the test rejects the respective hypothesis that there is no significant relationship between capital structure and return on capital employed. Hence, it is concluded that the return on capital employed is a significant factor which affects the capital structure of most of the selected companies in Indian paper industry. This result supports the results of Balram (2009) who found positive relationship and Karamjeet sing (2006) and Bidyut Jyoti Bhattacharjee (2010) who found negative relationship between debt equity ratio and return on capital employed in their respective studies. Debt equity ratio with return on net worth The relationship between debt equity and return on net worth have explored by means of regression analysis and presented in Table 5. The linear regression model fitted is as follows. D/E = α + β (RONW) + e (iv) Where, D/E - Debt equity ratio, RONW - Return on net worth, α, β - Parameters (intercept and co-efficient respectively) and e - Error term. Table 5 presents the regression analysis of the debt equity with return on net worth of the selected companies during the study period. The maximum level of co-efficient of determination of return on net worth (R 2 ) in case of Indian paper industry is 0.49 which influence 49 per cent changes in the debt equity ratio. The return on net worth of the sector influence 48 per cent changes in debt equity ratio. In case of individual companies, the co-efficient of determination (R 2 ) ranges from 3 per cent to 51 per cent. This suggests that one per cent change in return on net worth leads to three per cent to fifty one per cent changes in debt equity ratio of the selected companies during the study period. The beta co-efficient of return on net worth exhibits a negative relationship with the capital structure of both the Indian paper industry and the large scale sector of the paper industry during the study period. Among the selected companies, the beta co-efficient of return on net worth of all the selected large scale companies in Indian paper industry reveals a negative relationship except Mysore Papers Limited. However, the t value of the return on net worth proves a statistically significant relationship in eight out of ten companies at five per cent level of significance. Thus, the results of the study reject the null hypothesis. Hence, it is concluded that there is a significant relationship between debt equity and the return on net worth of the majority of the selected companies. These results are consistent with the results of Joshua (2007). However, Ramachandra (2006) and Bidyut Jyoti Bhattacharjee (2010) who found negative relationship between debt equity and return on net worth in their studies. Thus, return on net worth is a significant factor which affects the capital structure of most of the selected large scale companies in the Indian paper industry. Debt equity ratio with Earnings Per Share An attempt was made to empirically test the impact of earnings per share on capital structure of the selected large scale companies in the Indian paper industry. Table 29 presents the regression analysis of the debt equity with the earnings per share of the selected companies during the study period. The linear regression model fitted to test debt equity with earnings per share is as follows. IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 32

6 D/E = α + β (EPS) + e (v) Where, D/E - Debt equity ratio, EPS - Earnings per Share α, β - Parameters to be estimated (intercept and co-efficient) and e - Error term. Table 6 showed the extent to which the changes in earnings per share affect the capital structure. In case of Indian paper industry, the co-efficient of determination R 2 is 0.53 i.e. earnings per share leads to 53 per cent increase in the debt equity ratio. In case of the large scale sector, it influences 41 per cent changes in debt equity ratio. Among the individual companies the co-efficient of determination of earnings per share accounts for a variation of 20 per cent to 52 per cent. The beta coefficient of earnings per share of both the Indian paper industry and the large scale sector predicts a positive relationship with the debt equity ratio. Among the selected companies the beta co-efficient varies between companies. The beta co-efficient of all the selected companies have recorded a negative relationship except West Coast Paper Mills Limited during the study period. However, it is found that there exists statistically significant relationship between debt equity and earnings per share during the study period. Similarly, the degree of explanation of debt equity (R 2 ) in different companies also varied to a considerable degree. The estimates are in line with the null hypothesis and there is no relationship between capital structure and earnings per share of the selected companies. Thus, it is concluded that there is a negative relationship between capital structure and earnings per share of the selected companies during the study period. These estimates are in line with the results of Veni (2002), Falguni shastri (2005), Ramachandra (2006), Karamjeet Sing (2006) and Bidyut Jyoti Bhattacharjee (2010) who found a negative relationship between debt equity and earnings per share in their study. On the whole, the overall trend of this ratio kept fluctuating during the period under study. Thus, it can be concluded that the company with higher debt equity ratio have inverse relationship with earnings per share. Debt equity ratio with market price of share Table 7 presents the regression analysis of the debt equity with market price per share of the selected companies during the study period. The linear regression model fitted to test debt equity with market price per share is as follows. D/E = α + β (MPS) + e (vi) Where, D/E - Debt equity ratio, MPS - Market price per share, α, β - Parameters to be estimated (intercept and co-efficient) and e - Error term. Table 7 brings to light the relationship between debt equity ratio and market price per share. It has observed from the empirical test that the regression model applied has a good explanatory power. This is proved by the values of R 2 [0.41 and 0.59] and adjusted R 2 [0.33 and 0.47] for the paper industry and the large scale sector of the paper industry respectively, i.e. one per cent change in market price per share have an impact of about 41 per cent variation in the debt equity ratio of the paper industry and around 59 per cent in the large scale sector of the Indian paper industry. The co-efficient of determination (R 2 ) registered the highest value (0.56) in Hindustan Paper Corporation Limited and it was the lowest in JK Paper Mills Limited (0.15). This suggests that 15 per cent to 56 per cent changes in debt equity ratio are influenced by the change in market price per share. This difference between individual companies is expected because the firms ability to raise its market price depends on many factors and these factors differ from company to company. The beta co-efficient of market price per share points out a positive and significant relationship between debt equity and market price of both the industry and the large scale sector of the paper industry during the study period. It also reveals that market price per share is statistically IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 33

7 positive and significant in all the selected companies except in Hindustan Newsprint Limited and Rama Newsprint Limited. Further, though the beta co-efficient of Hindustan Newsprint Limited and Rama Newsprint Limited are negative, but it is statistically significant. Hence, it rejects the hypothesis of there is no significant relationship between capital structure and market price per share of the selected large scale companies in Indian paper industry. To conclude, the empirical result of the regression analysis of debt equity with market price per share discloses a positive and statistically significant relationship between capital structure and market price per share of majority of the selected companies in Indian paper industry. These results are supported by the findings of Schoolley (1990), and Veni (2002). But this result was contradictory to the findings of Karamjeet Sing (2006), Falguni shastri (2005) and Bidyut Jyoti Bhattacharjee (2010) who found negative relationship between debt equity and market price in their studies. Conclusion The impact of profitability on capital structure of Indian paper industry was examined using the technique of linear regression models. The result reveals a statistically positive and significant relationship between operating profit and capital structure of all the selected companies except JK Paper Mills Limited and Rama Newsprint Limited. It was found that profit after tax was a significant factor affecting the capital structure of the companies. The regression beta co-efficient of profitability of both the industry and the large scale sector of the paper industry are negative but it is statistically significant during the study period. The analysis also confirms that there was a direct relationship between net profit and capital structure of most of the selected companies. The analysis of t test rejects the set hypothesis and thereby proves that there exists a significant relationship between capital structure and net profit in eight out of ten companies. This observation seems to be very practical because those companies which have higher profit at their disposal tend to get the benefit of cheaper source of fund, i.e. debt can increase their profitability still further. The regression analysis reflects a negative impact of return on capital employed on capital structure of the Indian paper industry. It is also inferred that the return on capital employed is positive in five out of ten companies, but statistically significant in all the selected companies except Seshasayee Paper and Boards Limited during the study period. Thus, return on capital employed is a significant factor, which affects the capital structure of most of the selected companies in Indian paper industry. The regression analysis of the return on net worth with debt equity of the selected companies reveals a negative relationship in both the Indian paper industry and the large scale sector of the paper industry during the study period. All the selected large scale companies in Indian paper industry showed an inverse relationship between return on net worth and capital structure except Mysore Papers Limited during the study period. It is found from the analysis that all the selected companies registered a negative relationship between earnings per share and capital structure except West Coast Paper Mills Limited during the study period. The empirical result of regression analysis of market price per share with debt equity disclosed a positive and statistically significant relationship in majority of the selected large scale companies in Indian paper industry. Thus, the overall analysis of impact of profitability on capital structure reveals that operating profit margin, net profit margin and market price per share disclosed a positive and significant relationship with capital structure of majority of the selected companies during the study period. However, return on capital employed, return on net worth and earnings per share predicts a negative but statistically significant relationship with capital structure of majority of the selected companies during the study period. IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 34

8 References 1. Pandey, I.M. (1984). Financing Decision; A Study of Management Understanding, Management Review, Economic and Political Weekly, 7: Chakraborthy, S.K. (1990). Restructuring the Debt-Equity Ratio of Public Enterprises, Lok udyog, 13 (4): Ramkumar et al.(1996). Economic Analysis of Capital Structure Determinants, The Decision, 23(1-4): Jitendra Mahatud and L.M. Bhole (2003). Determinants of Corporate Capital Structrue in India : A Dyanamic Panel Data Analysis, ICFAI Journal of Applied Finance, (9) : Sudhansu and Omkarnath, (2005). Capital structure of Indian Private Corporate Sector- An Empirical Analysis, The ICFAI Journal of Applied Finance, 11(10): Debatrata Datta and Babita Agarwal (2009). Determinants of Capital Structure of Indian Corporate Sector in the period of Bull Run : An Econometric Study, Journal of Finance, 4(9): Ramesh, K.Singla (1996). Corporate Capital Structure-Planning and Determinants, New Delhi: Deep and Deep Publications. 8. Attaullah Shah and Safiullah Khan (2007). Determinants of Capital Structure: Evidence from Pakistani Panel Data, International Review of Business Research Papers, 3(4): Boopen Seetanah, Kesseven Padachi and Rishi Ronoowah (2007). Determinants of Capital Structure: Evidence from a Small Island Developing State, The ICFAI Journal of Applied Finance, 13(5): Yanmin qian (2007). An Empirical Investigation into the Capital Structure Determinants of Publicly Listed Chinese Companies, Journal of Financial Research, 30(1): Mallikarjunappa, T. (2007). Factors Determining the Capital structure of Pharmaceutical Companies in India, ICFAI Journal of Applied Finance, 13(11) Gunasekaran, M. (2008). Determinants of Capital Structure- An Empirical Study on Indian Industries, Finance India, Indian Institute of Finance, XX1 (1): Syed Tahir Hijazi and Yasir Bin Tariq (2006). Determinants of Capital Structure: A case for Pankistani Cement Industry,Lahore Journal of Economics,11(1): Bidyut Jyoti Bhattacharjee (2010). An Empirical Investigation into the Determinants of Capital Structure of Indian Industries, The IASMS Journal of Business Spectrum, II (2): Mihaela Dragota and Andreea Semenescu (2009). Debt-Equity Choice in Romania: The Role of Firm Specific Determinants, Indian Institute of Finance, XXIII (2): Sanjay Bhayani (2010). Intangible Assets, Research and Development Expenditure, Knowledge Capital and Capital Structure: A Study of Indian Pharmaceuticals Firms, Indian Journal of Accounting, XI (2): Rajan R.G. and Zingles I. (1996). What Do We Know About Capital Structure? Some Evidence from International Data, Journal of Finance, 50: Wald, J.K. (1999). How Firm Characteristics Affect Capital Structure: An International Comparison, Journal of Financial Research, 22: Joshua Arbor (2007). The Effect of Capital Structure on Profitability: An Empirical Analysis of Listed Firms in Ghana, University of Ghana Business School, Ghana, Working paper. 20. Ying Hong Chen and Klaus Hammes (2007). Capital Structure Theories and Empirical Results- A Panel data Analysis, Goteborg University Working Paper. 21. Karamjeet Sing (2006). Capital Structure in Competitive Environment-A Guide for Decision makers, New Delhi: Deep & Deep Publications (P) Ltd., 22. Balram Dogra and Shaveta Gupta (2009). An Empirical Study on Capital Structure of SMEs in Punjab, The ICFAI Journal of Applied Finance, 15(3) IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 35

9 23. Ramachandra Gowda,.Sharma, V.V.S. and Syeda Hafru Muzhes (2006). Regression Analyses on the Capital Structures of Selected Diversified Companies", Journal of Accounting and Finance, 20(2): Veni and Narayana, (2002). Leverage, Capital Structure, Dividend Policy and Practices, The Mnagement Accountant, 47: Falguni, C. Shastri (2005). Capital Structure of Indian Corporate Sector, Published in 2005, ISBN: , Delhi: Roshan offset press. 26. Schooley Diana Key (1990). An Examination of How CEO Stock Ownership and Corporate Ownership Structure are related to Corporate Debt Ratio, Dissertation Abstracts International, 51 (60): ANNEXURE Table 1 Selected paper companies for the study S. No Name of the Company Year of incorporation. Ownership Market Share 1. Andhra Pradesh Paper Mills Limited 1964 Bangur L.N., Ballarpur Industries Limited 1945 Avantha group Hindustan Paper Corporation Limited 1983 Govt. of India Hindustan Newsprint Limited 1970 Govt. of India JK Paper Mills Limited 1960 Singhania Harishanker 6. Mysore Paper Mills Limited 1936 State Govt. of Karnataka 7. Rama Newsprint and Papers Limited 1991 Bangur group Seshasayee Paper and Boards Limited 1960 Ervin group Tamil Nadu Newsprint and Papers Ltd State Govt. of Tamil Nadu West Coast Paper Mills Limited 1955 Bangur group 3.11 Source: Prowess database Total Market Share IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 36

10 Companies Table 2 Debt equity with operating profit margin -Regression Analysis (Dependent variable - Debt equity ratio) [ D/E = α + β (OP) ] Constant (α) Co-efficient of OP (β ) R 2 Adj.R 2 F P DW AP * (4.10*) BAL * (2.25**) HP * (3.60*) HNP * (4.15*) JK * (2.06**) MP * (2.47**) RN * (2.22**) SP * (2.95*) TNP * (2.28**) WC * (4.42*) Sector * (2.15**) Industry * (3.45*) ** - Significant at 0.01 level; ** - Significant at 0.05 level; Figures within parentheses indicate t values DW- Durbin Watson Statistics Source: Computed IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 37

11 Companies Table 3 Debt equity ratio with net profit ratio - Regression Analysis (Dependent variable - Debt equity ratio [ D/E = α +β (NP) ] Constant (α) Co-efficient of NP (β ) R 2 Adj.R 2 F P DW AP * (2.77*) BAL * (2.71*) HP * (2.44*) HNP * (1.68**) JK * (1.77**) MP * (2.14**) RN * (2.07**) SP * (2.26*) TNP * (0.97) WC * (1.60**) Sector ** (1.97**) Industry * ** * - Significant at 0.01 level; ** - Significant at 0.05 level; Figures within parentheses indicate t values DW- Durbin Watson Statistics Source: Computed IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 38

12 Companies Table 4 Debt equity with return on capital employed -Regression Analysis (Dependent variable - Debt equity ratio [ D/E = α +β (ROCE)] Constant (α) Co-efficient of ROCE (β) R 2 Adj.R 2 F P DW AP * (4.71*) BAL (1.71**) HP * (3.09*) HNP ** (1.76**) JK * (5.04*) MP * (2.57**) RN ** (1.95**) SP (0.35) TNP ** (1.96**) WC ** (1.94**) Sector * (2.75*) Industry * (2.72*) * - Significant at 0.01 level; ** - Significant at 0.05 level; Figures within parentheses indicate t values DW- Durbin Watson statistics Source: Computed IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 39

13 Companies Table 5 Debt equity ratio with return on net worth ratio -Regression Analysis (Dependent variable - Debt equity Ratio [ D/E = α +β (RONW)] Constant (α) Co-efficient of RONW(β) R 2 Adj.R 2 F P DW AP (3.35*) * BAL (2.31**) * HP (3.06*) * HNP (0.91) JK (2.72*) * MP (3.24*) * RN (0.61) SP (1.69*) ** TNP (1.46**) ** WC (1.36**) Sector (2.08**) * Industry (2.17**) * *- Significant at 0.01 level; ** - Significant at level; Figures within parentheses indicate t values DW- Durbin Watson Statistics IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 40

14 Table 6 Debt equity ratio with earnings per share - Regression Analysis (Dependent variable - Debt equity ratio) [D/E = α + β (EPS) ] Companies Constant Co-efficient (α) of EPS (β ) R 2 Adj.R 2 F P DW AP * (3.64*) BAL * (2.27**) HP * (2.03**) HNP ** (0.83) JK * (2.24**) MP (0.42**) RN (0.81) SP ** (1.92**) TNP ** (1.97**) WC * (3.44*) Sector ** (1.85**) Industry (2.85*) * * - Significant at 0.01 level; ** - Significant at level; Figures within parentheses indicate t values DW- Durbin Watson statistics Source: Computed IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 41

15 Companies Table 7 Debt equity ratio with market price per share -Regression Analysis (Dependent variable - Debt equity ratio [D/E = α + β (MPS)] Constant (α) Co-efficient of MPS (β ) R 2 Adj.R 2 F P DW AP ** (1.92**) BAL ** (1.94**) HP * (8.29*) HNP * (2.09**) JK (1.39**) MP * (2.90*) RN * (4.79*) SP (1.48**) TNP ** (1.76**) WC * (0.03) Sector * (2.01**) Industry (1.89**) * * - Significant at 0.01 level; ** - Significant at level; Figures within parentheses indicate t values DW- Durbin Watson Statistics Source: Computed IRJBM ( ) Volume No VII, December 2014, Issue 13 Page 42