Capital Structure Does the Nature Research Proposal

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Little study has been conducted of Indian firms debt-to-book rations before Rajagopal, but he indicates that, given the relatively recent expansion of India's economy, the difference between the U.S. And India, for example,, is not nearly as prohibitively large a one might suspect. This is not to deny that India faces persistent challenges unique in its place in the world: the nation has been "traditionally weighed down by heavily regulated capital markets, opaque accounting and disclosure, and weak corporate governance," but "its economy has seen significant market reform and liberalization since July 1991. As a result, total market capitalization has exploded (for example, tripling between 2002 and 2006), and debt issuance and M&a activity have also seen very significant growth" (Rajagopal 2009, p.28). Changes in the expanding world economy have surprised many analysts in terms of the seismic shift in India's business culture and ability to rationally deploy capital.

Indian businesses continue to possess characteristics that distinguish it from the typical developed economy, such as the dominance of a few major families in commerce and industry (Rajagopal 2009, p.28). However, Rajagopal's study from 1998-2002 was "the largest ever done since India's liberalization of its economic policies, it was found that the differences between India and developed nations such as the U.S. did not substantially affect capital structure choice" (Rajagopal 2009, p.28). This contradicts previous, pre-1991 findings whereby developing markets and the firms within them make choices were characterized by "extreme agency problems stemming from pyramid ownership structures, weak legal protection, and underdeveloped markets for corporate control" (Rajagopal 2009, p.28).

India's financing remains "underdeveloped," and "its capital markets still lack consistent analyst services and are burdened with high levels of information asymmetry" that can make choices regarding financing appear to be irrational in anecdotal situations (Rajagopal 2008, p.28).

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This reflects the theory that there is a 'pecking order' of "capital structure choice created by the presence of information asymmetries between the firm and its potential financiers. In this theory, external funds are less desirable because informational asymmetries imply that external funds are undervalued in relation to the degree of asymmetry" (Pardasani 2009).

Yet the current ability to solicit capital from non-traditional sources is changing in India: recently proposed Indian regulations wish to permit so-called 'thin capitalization' a situation where an entity has high proportion of debt as compared to equity, to free industries from the "rigidity of having a predefined debt-equity ratio" by law and also to seek out new sources of funding (Pardasani 2009). This will further 'rationalize' economic choices according to traditional models.

The best methodology to study the effects of intangible vs. tangible assets, specifically cultural capital vs. tangible capital, in Indian firms would likely be a cross-comparison between firms that have an established history within India's traditional leadership structure, and those that do not, to see if intangible assets such as political capital continue to have a great deal of influence upon decision-making. Two leading industrial sectors in which India has distinguished itself worldwide to provide points of comparison are the technological or it sector and the pharmaceutical sector. The available sample of publically-traded Indian firms remains small in proportion to listed U.S. firms, but ideally there must be a balance of industries, and a balance of businesses affiliated with traditional power structures those who do not possess this type of intangible asset.

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