Determinants of Financial Leverage: Evidence from Corporate India

Industries play a significant role in the economic development of any country. The success of such industries depends on the financing decisions. Corporate finance managers are in a position to design optimum capital structure considering different factors that affect the capital structure. This study is focused towards studying the trend in components of Financial leverage, identifying the factors determining the Financial Leverage and to study the inter-relationship between Cost of Capital and Financial Leverage. The study also analyses the suitability of Agency Theory, Trade-off theory, Signaling theory and Pecking order theory in select Indian industries. The study concludes that the variable ’solvency ratio’ is the major contributing variable in deciding the Debt-Equity ratio in eleven industries. Further, the results support the Pecking order theory as profitability is negatively related to debt in fourteen industries out of fifteen industries taken for study.