A goal programming approach to the study of optimal capital structure in the context of Indian corporate firms

The present study has been conducted to check the possible existence of an optimal capital structure in the Indian corporate sector.
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A goal programming approach to the study of optimal capital structure in the context of Indian corporate firms International Journal of Management (IJM) Volume 11, Issue 3, March 2020, pp. 193–207, Article ID: IJM_11_03_021 Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=11&IType=3 Journal Impact Factor (2020): 10.1471 (Calculated by GISI) www.jifactor.com ISSN Print: 0976-6502 and ISSN Online: 0976-6510 © IAEME Publication Scopus Indexed A GOAL PROGRAMMING APPROACH TO THE STUDY OF OPTIMAL CAPITAL STRUCTURE IN THE CONTEXT OF INDIAN CORPORATE FIRMS Uma Charan Pati Assistant Professor, School of Economics, Gangadhar Meher University, Amruta Vihar, Sambalpur, Odisha, India & Ph.D. Scholar in Sambalpur University, Sambalpur, Odisha, India Sudhanshu Sekhar Rath Former Vice Chancellor, Gangadhar Meher University, AmrutaVihar, Sambalpur, Odisha, India ABSTRACT The capital structure controversy debate is still to die down even after five decades of its birth from the seminal work by Modigliani and Miller in 1958. The irrelevance theorem was proved wrong by many later day theorists/empiricists but many postulated it otherwise. The existence of an optimal capital structure in the corporate sector has been debated extensively and non-conclusively too. The present study has been conducted to check the possible existence of an optimal capital structure in the Indian corporate sector. Besides other descriptive statistical techniques, the linear goal programming technique has been used to study whether the optimality objective is achieved by the thirty companies selected from private, public and IT sectors. The goal programming results show the non-existence of something called an optimal capital structure and instead corporate firms are inclined towards achieving multiple objectives/goals at a time and hence not optimizing rather satisfying level of achievement at multiple ends is the goal in the present globalised era of fierce competitions. Keywords: Corporate Finance, Goal Programming, Satisfying Behavior, Multi- objective goal setting Cite this Article: Uma Charan Pati and Sudhanshu Sekhar Rath, A Goal Programming Approach to the Study of Optimal Capital Structure in the Context of Indian Corporate Firms, International Journal of Management (IJM), 11 (3), 2020, pp. 193–207. http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=11&IType=3 http://www.iaeme.com/IJM/index.asp 193 editor@iaeme.com A Goal Programming Approach to the Study of Optimal Capital Structure in the Context of Indian Corporate Firms 1. INTRODUCTION The entire financial management literature is dominated by the capital structure controversy debate being initiated with the irrelevance theorem of Modigliani and Miller. A broad theoretical review brings forth the idea that the debate has not yet got settled. Movement from the MM hypothesis of capital structure irrelevance to the relevant MM hypothesis of 1963 followed by the trade-off theory and finally the pecking order theory reveals that the debate is still going on. Based on the whole analysis of the capital structure debate, in this study effort has been made to explore the possibility of the existence of an optimal capital structure in the Indian corporate sector. The whole study and analysis in this particular study has come down to the point that there is no specific or targeted capital structure that firms do follow across different sectors. However, there have been studies conducted to ascertain the possible impact of capital structure on the performance of the corporate firms. Taking cues from those theories and studies we have tried to explore the possible impacts of the capital structure of a company on its performance by using different inferential statistical analysis including the technique of Goal programming followed by the ANOVA and the F test. If we move deep into the theoretical premises on capital structure principles we find that almost all the theories have come to the conclusion that there is no concrete inference that can be drawn as regards the existence of something called an optimal capital structure. It has been proved by Nassar, S., (2016) , Marmara University, Institute of Social Science, Accounting and Finance Department, Istanbul/Turkey in his research work titled “The impact of capital structure on Financial Performance of the firms: Evidence From Borsa Istanbul” . By taking 136 Industries as a sample, and by using multivariate regression analysis including ” Return on Asset (ROA), Return on Equity (ROE) and Earning per Share (EPS) as well as Debt- Equity Ratio (DR) as capital structure variables, he has derived the conclusion that there is a negative significant relationship between capital structure and firm performance.” Some other studies have also confirmed the existence of this particular relationship. 1.1 Relationship between the Capital Structure and Firm’s Financial Performance: A Theoretical Analysis As has already been referred earlier, there is a great debate started with the MM Hypothesis on the relevance of a capital structure and its impact on the financial performance of corporate firms. Right from the Modigliani and Miller Theory of 1958 and then 1963, followed by the traditional theory, the trade-off theory and the Pecking Order theory upto the Managerial Entrenchment theory, we find that there is no general rule or formula of an optimal capital structure and for that matter there is no significant impact found in the relationship between the capital structure and the firms‟ financial performance. ...