Capital Structure of Growth Companies with Reference to Indian Software Industry

Abstract

The decision on capital structure makes an impact on the overall cost of capital and consequently value of the firm. The capital structure decision of growth companies is even more important as the companies require fresh fund to finance growth. In this study, the sales of software companies in India during 2000-2012 have demonstrated that they certainly fall under the category of growth companies. However, these companies are mostly debt-free during the period of study. It seemed that these companies follow Pecking Order Theory. This paper seeks to find out the reason behind almost debt-free capital structure and also demonstrates how liquidity management and risk management could take a pivotal role to determine the capital structure of these growth companies.

Keywords: Capital Structure, Debt-equity Ratio, Growth Companies, Net Income Approach, Net Operating Income Approach, Pecking Order Theory

JEL Classification: G32, L86, O16, O43