Testing the Pecking Order Theory of Capital Structure: Evidence from the Indian Corporate Sector - Jitendra Mahakud

Assistant Professor, Finance, Institute of Management Technology, Ghaziabad, Uttar Pradesh, India. E-mail: jmahakud@yahoo.com The objective of this paper is to make a comprehensive study of the financing pattern of the Indian corporate sector over a period of five years. The paper constructs and estimates the latest sophisticated panel data models for testing the Pecking Order Theory. The Pecking Order Hypothesis in the context of India is then checked using the data for for 20000-01 to 2004-05, by applying the methods used by Shyam-Sunder and Myers, and Goyal and Frank. The paper concludes that the Pecking Order of Funds is not followed by Indian companies. Introduction The Pecking Order Hypothesis of corporate capital structure Theory is one of the celebrated theories of corporate finance, formulated by Myers and Majluf (1984). This theory has been formulated to mitigate the inefficiencies in the firms' investment decisions that are caused by the information asymmetry. Here, the optimal capital structure emerges as a solution to the optimal investment decision problem. Myers and Majluf have argued that if managers have better information about the future investment opportunity of the firm than the potential investors, they might find it difficult to get external finance. This is because outsiders ask for a premium in order to compensate for the possibility of funding a bad firm. If the firm tries to finance its new projects by issuing equity, then the underpricing may be so severe that a good firm may find it profitable to reject some of its projects even with a positive Net Present Value (NPV). Thus, the firm will always try to choose a security that would minimize this problem, which is called as the `Lemon Problem'. The internal sources of funds, however, do not suffer from such a problem. Similarly, debt will be preferred to equity because the possibility of underpricing is much less here. Thus, capital structure choice will be driven by a hierarchical preference. First, internal funds are selected; and then, the risky debt; and finally the equity. This hypothesis, known as `Pecking Order Hypothesis', is valid for the corporate financing pattern of developed countries, where the internal funds occupy the first position in the pecking order of funds. During the recent years, researchers are working on ways to test the use of Pecking Order Hypothesis in the financing pattern of firms in developing countries. Although this line of research is highly developed in other developed countries, the absence of research in India is noticeable particularly in respect of advanced empirical modeling to test the Pecking Order Theory. In the period of liberalization, the Indian financial system in general and the corporate financing practices in particular, have undergone significant structural and other changes. therefore, it is necessary to undertake an empirical study of the Pecking Order Theory in India so as to strengthen our understanding of this issue under the changed circumstances. The objective of this paper is to make a comprehensive study of the financing pattern of the Indian corporate sector over a period of five years. The paper constructs and estimates the latest sophisticated panel data models for testing the Pecking Order Theory. This paper is organized as follows: After providing a brief review of the earlier work on Pecking Order Theory, the theoretical models are specified to test the theory in India. Next, the period of study, sources of data and the methodology used are presented, followed by the empirical results from panel data models. Finally, the concluding remarks are presented. Literature Review The literature on the Pecking Order Hypothesis starts with Myers and Majluf (1984). According to them, capital structure choice will be driven by a hierarchical preference. First internal funds are selected and then the risky debt and finally the equity. This hypothesis is known as `Pecking Order Hypothesis'. This hypothesis is very much valid for the corporate financing pattern of the

developed countries, where the internal funds occupy the first position in the pecking order of funds. According to Chirinko and Singha (2000), the Pecking Order Theory (POT) has two forms: the strong and the semi-strong or weak form. Under the strong form, firms never issue equity, financing themselves exclusively with internal resources and debt. The semi-strong form admits a certain level of equity issues, which Chirinko and Singha (2000) consider more plausible and likely to be found and tested. The POT does not reject entirely the issue of new shares. It could happen in two specific situations without confronting the theory. The first one is when the firm needs a financial fund for future events not yet forecasted (Myers, 1984; Frank and Goyal, 2003). The second is when the information asymmetry ceases to exist for some reason temporarily, permitting the firm to take advantage of this and to issue new stock at a fair price (Myers, 1984). Lemmon and Zender (2001) and Fama and French (2002) emphasized on these issuing possibilities. Lemmon and Zender (2001) pointed out the debt capacity factor as an important limitation for issuing new debt. Firms with their debt capacity depleted could not issue new debt. The remaining option would be the issue of new equity. If this happened, the POT could not be rejected. According to Fama and French (2002), there was also another possibility leading the firms to issue new equity without violating the POT. This would happen when firms anticipate need for new external financing in the near future for the implementation of new projects. Should this foreseen debt requirement become unfeasible by a future debt ratio above the firms' capacity, it will issue new shares so as to be able to issue more debt in the future. Rajan and Zingales (1995) have used different information set to account for corporate leverage. therefore, it is interesting to see how the financing deficit performs in a nested model that also includes conventional factors. According to them, the Pecking Order Theory implies that the financing deficit ought to wipe out the effects of other variables. If the financing deficit is simply one factor among many that firms trade-off, then what is left is a generalized version of the tradeoff theory. Shyam-Sunder and Myers (1999) have found strong support for this prediction in a sample of 157 firms that had traded continuously over the period 1971 to 1989. This is an attractive and influential result. The pecking order is offered as a highly parsimonious empirical model of corporate leverage that is descriptively reasonable. Benito (2003) has found that in the UK, which has a market-based financial system, the propensity to issue additional debt is high compared to that for issuing new equity and found to be more sensitive to financial characteristics of the firm. The results are consistent with the pecking order approach, which is consistent with the existence of a hierarchy of finance faced by firms in the UK. In the case of India, Bhole (1980 and 2000) found that there is no pecking order in the case of the Indian corporate sector. Singh and Hamid (1992) and Singh (1995) have analyzed the financing pattern of developing countries like India, and found that there is no pecking order in this case. Samuel (1996) finds that internal finance plays a lesser role in Indian firms than in US firms, and external debt a bigger role. This is consistent with the theoretical predictions that information and agency problems are less severe for Indian firms than for US firms. India's financial system is predominantly bank-oriented. Based on the data for a sample of the largest firms, Rajbhandary (1997) has used a dynamic adjustment model in the Indian context also, and found that the lagged values of the capital structure ratio is positively related with the current values of the capital structure ratio which accepts the dynamics implied by his model; he also found there is no pecking order. Cobham and Subramaniam (1998) provide evidence that Indian firms make more use of equity financing than firms in the developed countries. These results have been used to argue in favor of investing heavily in the development of stock markets in developing firms. They have investigated the possibility that such an analysis could be too sample-specific in that the largest firms do not represent the entire Indian private corporate sector. Their analysis, based on sectoral and cumulative firm-level data for India, suggests that while firms do make a significant use of equity issues, the nature of equity financing may be different in an environment in which a number of firms are not listed on stock exchanges but may be issuing equity. The results show that bank loans and internal finance are more important sources of corporate financing. Sectoral and firmlevel data from the United Kingdom are utilized to compare the behavior of Indian firms with that of firms in developed countries. They have concluded that India is not obviously very different from the low internal finance developed countries and that, since a large part of equity issues are by unlisted firms, the gains from the promotion of stock markets may be limited.

Mahakud and Bhole (2003) have found that Indian companies did not follow the pecking order of funds. Dasgupta and Ying (2001) have argued that the Pecking Order Hypothesis and the trade-off theory of capital structure choice should be viewed as complementary rather than alternative ideas. In choosing whether to finance their projects with debt, equity or internal funds need to consider the information costs of issuing securities as well as bankruptcy costs, tax advantage of debt, etc. They also argued that an implication of the Pecking Order Hypothesis is that, firms with high growth potential should have more debt as a proportion of total assets. Models Specification According to the traditional theory, four factors are used to test the Pecking Order Theory: tangibility of assets, market to book ratio, size of the firm, and profitability. Under the Pecking Order Theory, Harris and Raviv (1991) have argued that firms with few tangible assets would have greater asymmetric information problems. Thus, firms with few tangible assets will tend to accumulate more debt over time. Hence, Harris and Raviv have hypothesized that the Pecking Order Theory will be valid if there is a negative relationship between tangibility and the leverage ratio. But as per the conventional theory, a more common argument is that tangible assets can be used as the collateral for the debt, so that the firm with higher tangible assets can increase the debt ratio than the intangible asset based firms. Therefore, a positive relationship can be assumed between debt ratio and tangibility. Firms with high market-to-book ratios are often considered to have more future growth opportunities. Myers (1977) has argued that debt could limit a firm's ability to increase the growth opportunities. Barclay, Morellec, and Smith (2001) have presented a model showing that the debt capacity of growth options can be negative. Therefore, a negative relationship can be assumed between market-to-book ratio and leverage ratio. Due to the better accessibility in the debt market, large firms usually face lower information costs when borrowing. Therefore, large firms are predicted to have more debt in their capital structures. Titman and Wessels (1988) and Fama and French (2002) show that this is not a common finding and the literature finds profits and leverage to be negatively correlated. Fama and French (2002) have noted that the negative relationship between profits and leverage is consistent with the Pecking Order Theory. With all these four variables, the financing deficit variable has been also added in the equation to check the effects of this on the other conventional variables. The lagged value of the leverage ratio is also added in the equation to check the dynamic effects. Therefore, the model can be specified as: Dit = a + b1 TANit+b2 MTBit+b3SZit+b 4PRit+b5FINDit + b5Dit-1 + uit ...(1) Where, D = debt ratio (ratio of total debt to market capitalization), TAN = tangibility (ratio of fixed assets to total assets), MTB = market to book value ratio (ratio of the market value of equity to book value of equity), SZ = size of the firm (ln of sales), PR = profitability (operating income to book value of assets), FIND = financing deficit (dividend + investment + change in working capital - cash flow), and uit = error term. Shyam-Sundar and Myers (1999) have argued that after an Initial Public offering (IPO), equity issues are only used in extreme circumstances. The model can be specified as: Dit = a + b FINDit + eit ...(2) According to them, the Pecking Order Hypothesis is that a=0 and b=1. Where, D it = net debt issued in year t (change in long-term debt), FINDt = (DIVDt + It + DWt + LDt _ Ct) / Net Assets; DIVDt = Cash dividend in year t, It = net investment in year t, DWt = change in working capital in year t, LDT = current portion of the long-term debt, Ct = cash flow after interest and taxes. In contrast to the accounting definition of deficit financing, Frank and Goyal (2002) have excluded the current portion of long-term debt as a part of financing deficit.

Their model is specified as follows: Dit = c + d FINDit + fit ...(3) Where the financing deficit ratio has been defined as: FINDt = (DIVDt + It+ DWt - Ct) / Net Assets. Again it is also argued that to test the Pecking Order Theory, we need to aggregate the accounting data, but the question arises whether this step is justified or not? To overcome that limitation a disaggregated model also has been specified as: Dit = h + g1 DIVDt + g2 It + g3 DWt + g4 LDt - g5 Ct + hit ...(4) Dit = i + j1 DIVDt + j2 It + j3 DWt - j4 Ct + kit ...(5) It is assumed that under the Pecking Order Theory the FIND is the thing that matters. A unit increase in any of the components of FIND must have the same unit impact on D. The Pecking Order Hypothesis is valid if g1 = g2 =g3 =g4 =g5=1 for Equation (4) or j1 = j2 =j3 =j4 =j5 =1 for equation 5. If the hypothesis is correct, then the aggregation in Equation (1) is justified. Data and Methodology The period of study for this paper is from 2000-01 to 2004-05, the period of after liberalization and the period for which we have the most coverage in the data base. The firm level panel data is taken into consideration and it is collected from the corporate data base PROWESS maintained by Center for Monitoring the Indian Economy (CMIE). The data used in the analysis consists of the manufacturing firms listed on the Bombay Stock Exchange (BSE). We have also restricted our analysis to firms that have no missing data continuously for five years. Finally, we ended up with787 firms, resulting in a balanced panel of 3945 observations. Panel data models have been used to estimate the leverage equation. Panel data model has been used to estimate the equation because of certain advantages of this methodology over other methodology in corporate finance literature. Hsiao (1986) has pointed out that panel data is used to control the effects of missing or unobserved variables. Panel data control the individual heterogeneity, so that the risk of obtaining biased results come down (Moulton and Randolph, 1989). Klevemarken (1989) and Solon (1989) have argued that panel data gives more information, more variability, less collinearity among the variables, more degrees of freedom, and more efficiency models than purely cross-section and time-series data. The technical efficiency of the economic behavior is better studied and modeled with panel data (Baltagi and Griffin, 1988; Cornwell, Schmidt and Sickles, 1990; Kumbhakar, 1990). Odedokum (1996) argued that panel data estimation yields more robust effects of independent variables on dependent variables than the time-series estimation does. In the panel data models, the unobservable effects can be accommodated using one of the two techniques. First, the unobservable effects can be included in the error term. The variance covariance matrix of the resulting non-spherical errors must be transformed to obtain consistent estimates of the standard errors. In this case, the "random effects" estimator is appropriate (Hsiao, 1986). However, a problem arises with the random effects estimator if the unobservable effects, which have been included in the error term, are correlated with some or all of the regressors. As a consistent alternative to the random effect estimator, a dummy variable can be included in each firm. This estimation approach is known as "fixed effects" and it gives consistent estimates regardless of correlation between firm-specific error component and regressors. If the coefficients are assumed to be fixed then the coefficients are estimated by dummy variable models. This estimation approach is known as fixed effect approach, which yields consistent estimates regardless of correlation between firm specific error component and regressors. If we take the dummy variables for the firms only, then that model is called one-way fixed effect model, and if we take dummy variables for both firm and time also, then that model is called two-way fixed effect models. There are too many parameters in the fixed effect models and the loss of degrees of freedom is very high. It can be avoided if the ui can be accepted to be at random. That

is known as random effect model. The individual effect is characterized as random and inference pertains to the population from which this sample was randomly drawn. Before estimating the above-mentioned panel data models, we have carried out Likelihood Ratio (LR) test (Gourieroux, Holly and Monfort,1982), Lagrange Multiplier (LM) test (Breusch and Pagan, 1980), and Hausman specification test (Hausman, 1978). It was necessary to carry out these tests to know the significance of the firm and time effects in the data set, and to find out a suitable panel data method for the estimation of the model. Empirical Results Table 1 shows that the null hypotheses H01; sm2=0 and H02; sm2=sl2 =0 are rejected. Clearly, the LR test results show that both the firm and time effects are present in the data. Lagrange Multiplier test statistics presented in Table 2 indicate that either the fixed effect or random effect panel data models are to be preferred to classical regression model that means the null hypothesis of the use of panel data models has been rejected. Hausman specification test results presented in Table 2 infer to focus on fixed effect estimates, so that both the fixed effect firm, and fixed effect firm and time models are preferred to other models to determine the factors that affect the capital structure. The important results of the estimation of leverage equation from fixed effect firm, and fixed effect firm and time models for all the models i.e., conventional regression analysis, Shyam Sunder-Myers, and Frank and Goyal Models (Tables 2, 3 and 4) are as follows:

Table 2: Leverage Regressions variables and Financing Deficit Variables (1) Constant TAN MTB SZ PR FIND LD N R2

with

Conventional

Fixed Effect Firm Models (2) 0.169*** (0.011) -0.046** (0.017) 0.039*** (0.009) -0.173*** (0.029) 3945 0.49 (3) 0.183*** (0.012) -0.031** (0.011) 0.023** (0.011) -0.201*** (0.037) 0.156*** (0.006) 3945 0.53 0.176*** (0.011) -0.032** (0.011) 0.011*** (0.003) -0.161*** (0.017) 0.156*** (0.006) -0.139*** (0.007) 3945 0.61 (4)

Note: (1) The values in the parenthesis below the coefficients show the standard errors, (2) *, **, and *** show the 10%, 5%, and 1% level of significance, respectively. (3) The fixed effect firm model doesn't have any intercept term. (4) The standard errors are robust to heteroscedasticity.

Table 2: Leverage Regressions variables and Financing Deficit Variables (1) Constant TAN MTB SZ PR FIND LD N R2

with

Conventional

Fixed effect Firm and Time Models (5) 0.019** (0.008) 0.173*** (0.012) -0.027** (0.012) 0.041*** (0.009) -0.181*** (0.028) 3945 0.50 (6) 0.025** (0.011) 0.176*** (0.008) -0.029*** (0.011) 0.029** (0.014) -0.182*** (0.041) 0.167*** (0.015) 3945 0.57 (7) 0.031*** (0.009) 0.189*** (0.017) -0.037** (0.018) 0.023*** (0.007) -0.144*** (0.015) 0.163*** (0.007) -0.141*** (0.008) 3945 0.63

Note: (1) The values in the parenthesis below the coefficients show the standard errors, (2) *, **, and *** show the 10%, 5%, and 1% level of significance, respectively. (3) The fixed effect firm model doesn't have any intercept term. (4) The standard errors are robust to heteroscedasticity.

Table 3: Pecking Order of Funds Test Using Shyam Sunder and Myers and Frank and Goyal's Model Variables (1) Constant FIND N R2 Fixed Effect Models (2) 0.369*** (0.027) 3945 0.41 (3) 0.239*** (0.018) 3945 0.39 Firm Fixed effect Firm and Time Models (4) 0.007*** (0.002) 0.376*** (0.031) 3945 0.43 (5) 0.086*** (0.029) 0.247 (0.018) 3945 0.40

Note: (1) The values in the parenthesis below the coefficients show the standard errors, (2) *, **, and *** show the 10%, 5%, and 1% level of significance, respectively. (3) The fixed effect firm model doesn't have any intercept term. (4) The standard errors are robust to heteroscedasticity. Table 2 shows the results of the conventional regression model. The estimated regression coefficients on the tangibility, firm size, market to book ratio and profitability have their expected signs. The regression coefficient sign is positive on tangibility which is against the Pecking Order Theory. It is negative on the market to book ratio, positive on size of the company and negative on profitability. Columns 3 and 6 present the regression results of leverage equation for both the fixed effect firm and fixed effect firm and time models. In these two columns the leverage equation is estimated with financing deficit as an additional explanatory variable. It is argued that under

Pecking Order Theory inclusion of financing deficit variable should have wiped out the effects of other variables, but the results show that it has not happened, so that adding the deficit variable to the regression did not have much effect on the magnitudes and significance of the coefficients on the other variables. However, this variable is statistically significant. In columns 4 and 7 the leverage equation is again estimated with lagged leverage as an additional explanatory variable with other variables including financing deficit variable. The regression coefficient on lagged leverage is fairly large in magnitude and it is statistically significant. The negative sign on lagged leverage suggests that mean reversion is at work as predicted by trade-off theory. Inclusion of lagged leverage does not affect the sign and significance of most of the other variables in the regression. Table 3 shows the results of the estimation of the model specified by Shyam-Sunder and Myers (1999) and Frank and Goyal (2003). The columns 2 and 4 represent the results from Shyam-Sunder and Myers (1999) model estimation. The regression coefficient of financing deficit in both the cases is very low, which reject the Pecking Order Theory for these Indian companies, but the coefficient is statistically significant. Table 4: Pecking Order of Funds Test Using Shyam Sunder and Myers, and Frank and Goyal's Disaggregated Model Variables (1) Constant DIVD I DW C 0.211*** (0.034) 0.509*** -0.117 0.479*** -0.109 -0.011 LD N R2 -0.153** (0.051) 3945 0.33 Fixed Effect Models (2) (3) 0.267*** (0.049) 0.531*** -0.121 0.389*** -0.101 -0.029 3945 0.29 Firm Fixed effect Firm and Time Models (4) 0.089*** (0.024) 0.217*** (0.035) 0.497*** -0.114 0.483*** -0.108 -0.023 -0.159** (0.057) 3945 0.34 (5) 0.062*** (0.017) 0.281*** (0.051) 0.549*** -0.127 0.411*** -0.103 -0.569*** -0.024 3945 0.3

-0.564*** -0.576*** -0.573***

Note: (1) The values in the parenthesis below the coefficients show the standard errors, (2) *, **, and *** show the 10%, 5%, and 1% level of significance, respectively. (3) The fixed effect firm model doesn't have any intercept term. (4) The standard errors are robust to heteroscedasticity. Table 4 reports the disaggregated deficit financing component regressions. Column 2 gives the results from the model specified by Shyam-Sunder and Myers where long-term debt is also included in the calculation of the financing deficit. Columns 3 and 5 show the results from the estimation of the model specified by Frank and Goyal (2003). The regression coefficient of dividend has the positive sign and statistically significant. As predicted by Pecking Order Theory, there should be a positive sign and unit coefficient on investment and working capital. According to the theory after controlling for internal cash flows, investments in fixed assets and working capital should be matched by increase in debt issue. In this context, the trade-off theory also assumes a positive relation between debt ratio and investment. The argument behind this trade-off theory is that higher investments increase the tangible assets, which in turn increases the debt capacity. In our case, although the regression coefficient of investment has positive size and statistically significant, it is not close to unity.

The positive relation between change in working capital and debt ratio might also reflect timing issues. If a firm issues long-term debt then it receives cash. Until the firm spends that cash it can be put into bank account or other short-term investments that are included in working capital (Frank and Goyal, 2003). The regression coefficient of internal cash flow has the negative sign and it is statistically significant but again it can be argued that if internal cash flow measures future growth opportunity, then the trade-off theory also predicts the same relationship between cash flow and debt ratio. Columns 2 and 4 have included current portion of long-term debt as an explanatory variable. The sign of the regression coefficient of long-term debt is negative and the magnitude is vary small. This evidence is not consistent with the Pecking Order Theory. Conclusion The Pecking Order Theory is tested by using a larger sample size of the Indian corporate sector. The results from LR, LM and Hauseman tests have concluded that panel data models can be used to estimate the leverage equations. The conclusions from the conventional regression analysis have rejected the use of Pecking Order Theory although some of the variables have the same sign as predicted by Pecking Order Theory. This is consistent with the findings of Fama and French (2002). For the other models, it has been found that financing deficit adds a small amount of extra explanatory power, but it does not challenge the role of the conventional leverage factors. From the disaggregated model results, it is found that there are some variables which have the equal signs as predicted by Pecking Order Theory but the magnitude of the coefficients are not one or close to one, which goes against the Pecking Order Theory and all these signs also can be predicted in the trade-off theory. Therefore, it is concluded that the pecking order of funds is not followed by Indian firms. References 1. Baltagi B H and Griffin J M (1988), "A Generalized Error Component Model with Heterscedastic Disturbances", International Economic Review, Vol. 29, pp. 745-753. 2. Barclay M J, Morellec E and Smith C W (2001), "On the Debt Capacity of Growth Options", Unpublished working paper, University of Rochester, New York, USA. 3. Benito A (2003), "The Capital Structure Decision of Firms: Is there a Pecking Order" (www.bde.es). 4. Bhole L M (1980), "Determinants of Corporate Financial Structure" in Joshi N C and Kesary V G (eds) Readings in Management, Wheeler, Allahabad, India. 5. Bhole L M (2000), Financing of the Private Corporate Sector: Trends, Issues and Policies, Himalaya Publishing House, Mumbai. 6. Breusch T S and Pagan A R (1980), "The Lagrange Multiplier Test and its Application to Model Specification in Econometrics", Review of Economic Studies, Vol. 47, pp. 239-253. 7. Chirinko R S and Singha A R (2000), "Testing Static Tradeoff Against Pecking Order Models of Capital Structure: A Critical Comment", Journal of Financial Economics, Vol. 58, pp. 417-425. 8. Cobham D and Subramaniam R (1998), "Corporate Finance in Developing Countries: New Evidence for India", World Development, Vol. 26, pp. 1033-1047. 9. Cornwell C, Schmidt P and Sickles R C (1990), "Production Frontiers with Cross-sectional and Time-series Variation in Efficiency Levels", Journal of Econometrics, Vol. 46, pp. 185-200. 10. Dasgupta S and Ying C Y (2001), "Testing Capital Structure Theories: The Evidence from India", HKUST Business School Working Paper. 11. Fama E and French K (2002), "Testing Tradeoff and Pecking Order Predictions About Dividends and Debt", Review of Financial Studies, Vol. 15, pp. 1-33.

12. Frank M Z and Goyal V K (2003), "Testing the Pecking Order Theory of Capital Structure", Journal of Financial Economics, Vol. 67, pp. 217-248. 13. Gourieroux C, Holly A and Monfort A (1982), "Likelihood Ratio Test, Wald Test, and KuhnTucker Test in Linear Models with Inequality Constraints on the Regression Parameters", Econometrica , Vol. 50, pp. 63-80. 14. Harris M and Raviv A (1991), "Theory of Capital Structure", Journal of Finance, Vol. 46, pp. 297-355. 15. Hausman J A (1978), "Specification Tests in econometrics", Econometrica, Vol. 46, pp. 12511271. 16. Hsiao C (1986), Analysis of Panel Data, Econometric Society Monographs, Cambridge University Press, New York. 17. Klevemarken N A (1989), "Panel Studies: What can be Learnt from them?", European Economic Review, Vol. 33, pp. 523-529. 18. Kumbhakar S C (1990), "Production Frontiers, Panel Data, and Time-varying Technical Inefficiency", Journal of Econometrics, Vol. 46, pp. 201-211 19. Lemmon M L and Zender J F (2001), "Looking Under the lamppost: An empirical Examination of the Determinants of Capital Structure", Unpublished working paper, University of Utah and University of Arizona. 20. Mahakud J and Bhole L M (2003), "Determinants of Corporate Capital Structure in India: A Dynamic Panel Data Analysis", IUP Journal of Applied Finance, Vol. 9, pp. 41-54. 21. Moulton B R and Randolph W C (1989), "Alternative Tests of the Error Components Model", Econometrica, Vol. 57, pp. 658-693. 22. Myers S (1977), "Determinants of Corporate Borrowings", Journal of Financial Economics, Vol. l.5, pp. 147-175. 23. Myers S and Majluf N (1984), "Corporate Financing and Investment Decisions When Firms have Information that Investors don't have", Journal of Financial Economics, Vol. 13, pp. 187-221. 24. Myers S (1984), "The Capital Structure Puzzle", Journal of Finance, Vol. 39, pp. 575-592. 25. Odedokun M O (1996), "Alternative Econometric Approaches for Analyzing the Role of the Financial Sector in Economic Growth: Time-series Evidence from LDCs", Journal of Development Economics, Vol. 50, pp. 119-146. 26. Rajan R and Ziangles L (1995), "What do We Know About Capital Structure? Some Evidence from International Data", Journal of Finance, Vol. 50, pp. 1421-1460. 27. Rajbhandary A (1997), Capital Structure of Firms in Developing Countries: Results for India", Unpublished Manuscript. 28. Samuel C (1996), "The Stock Market as a Source of Finance", World Bank Policy Research Working Paper, No. 1592, World Bank, Washington DC. 29. Shyam-Sunder L and Myers S C (1999), "Testing Static Tradeoff Against Pecking Order Models of Capital Structure", Journal of Financial Economics, Vol. 51, pp. 219-244. 30. Singh A and J Hamid (1992), "Corporate Financial Structures in Developing Countries", International Finance Corporation Technical Paper, World Bank, Washington DC.

31. Singh A (1995), "Corporate Financing Patterns in Industrialized Economies: A Comparative International Study", International Finance Corporation Technical Paper No. 2, World Bank, Washington DC. 32. Solon G S (1989), "The Value of Panel Data in Economic Research", in Kesprzyk D, Duncan G J, Kalton G and Singh M P (eds) Panel Survey John Wiley, New York, pp. 486-496. 33. Titman S and Wessels R (1988), "The Determinants of Capital Structure Choice", Journal of Finance, Vol. 43, pp. 1-19. Reference # 01J-2006-11-02-01.