The Impact of Capital Structure on Profitability with Special Reference to IT Industry in India vs. Domestic Products

Abstract

Firms can use either debt or equity capital to finance their assets. The best choice is a mix of debt and equity. The present study mainly analyses how far the capital structure (CS) affects the Profitability (P) of corporate firms in India. The study tries to establish the hypothesized relationship as to how far the CS affects the business revenue of firms and what the interrelationship is between CS and Profitability. This study is carried out after categorizing the selected firms into three categories based on two attributes, viz. business revenue and asset size. First, firms are grouped into low, medium and high based on business revenue. Second, firms are classified into small, medium and large based on asset size to establish the hypothesized relationship that CS has significant impact on Profitability of Information Technology (IT) firms in India. For the study, a sample of 102 it firms was chosen by the Multi- Stage Sampling Technique. The data for a period of 8 years ranging from 1999–2000 to 2006–2007 have been collected and considered for analysis. Regression Analysis (to analyze the unique impact of CS on Profitability), in addition to descriptive statistics such as Mean, Standard Deviation, and Ratios has been used. The study proves that there has been a strong one-to-one relationship between CS variables and Profitability variables, Return on Assets (ROA) and Return on Capital Employed (ROCE) and the CS has significant influence on Profitability, and increase in use of debt fund in CS tends to minimize the net profit of the IT firms listed in Bombay Stock Exchange in India.capital structure, profitability, return on assets, return on capital employed, debt, equity