Capital Structure Theories and its Practice, A study with reference to select NSE listed public sectors banks, India

TL;DR

This paper examines how capital structure theories relate to the real-world financial performance of select Indian public sector banks from 2011 to 2022, using statistical analysis to validate theoretical hypotheses.

Contribution

It develops a theoretical framework based on existing capital structure theories and tests their applicability to Indian public sector banks using empirical data.

Findings

Positive correlation between debt levels and bank performance

Validation of certain capital structure theories in the banking context

Insights into how regulatory environment influences capital structure choices

Abstract

Among the various factors affecting the firms positioning and performance in modern day markets, capital structure of the firm has its own way of expressing itself as a crucial one. With the rapid changes in technology, firms are being pushed onto a paradigm that is burdening the capital management process. Hence the study of capital structure changes gives the investors an insight into firm's behavior and intrinsic goals. These changes will vary for firms in different sectors. This work considers the banking sector, which has a unique capital structure for the given regulations of its operations in India. The capital structure behavioral changes in a few public sector banks are studied in this paper. A theoretical framework has been developed from the popular capital structure theories and hypotheses are derived from them accordingly. The main idea is to validate different theories with real time performance of the select banks from 2011 to 2022. Using statistical techniques like regression and correlation, tested hypotheses have resulted in establishing the relation between debt component and financial performance variables of the select banks which are helping in understanding the theories in practice.