Title: Testing dynamic trade-off theory of capital structure: an empirical study for the textiles industry in India and China

Authors: Barnali Chaklader; Dinesh Jaisinghani

Addresses: Professor and Chairperson FPM Program and Research, International Management Institute, B – 10, Qutab Institutional Area, New Delhi 110016, India ' Institute of Management Technology, Survey No. 38, Cherlaguda Village, Shamshabad Mandal, RR District, Hyderabad, Telangana 501218, India

Abstract: The prime objective of the current study is to compare the dynamic behaviour of capital structure across firms operating in the textile industry in India and China. The study has been conducted by analysing 92 publicly listed textiles firms in India and 33 publicly listed textiles firms in China. The time period from 2005 to 2016 for Indian firms and from 2004 to 2015 for the Chinese firms has been considered. The Arellano and Bond (1991) and Blundell and Bond (1998) based dynamic panel estimation techniques have been deployed to generate the results. The empirical results confirm the applicability of the dynamic trade-off theory for the textile industry in India and China. Further, the results show that the speed of adjustment towards the targeted debt level is very low for the Indian textile companies as compared to that of the Chinese textile companies. The results strongly convey that Indian firms bear significant costs while moving from their observed leverage to their target leverage. The overall results support partial applicability of dynamic trade-off theory for the Indian firms and strong applicability of the theory for the Chinese firms.

Keywords: capital structure; dynamic trade-off theory; textiles industry; emerging economies; dynamic panel regression; India; China.

DOI: 10.1504/AAJFA.2017.087516

Afro-Asian Journal of Finance and Accounting, 2017 Vol.7 No.4, pp.378 - 401

Received: 01 Sep 2016
Accepted: 23 Apr 2017
Published online: 16 Oct 2017 *

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