12 - Chapter 4 PDF

Chapter IV
DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS
A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY
89
Chapter IV
CHAPTER IV
DETERMINANTS OF PROFITABILITY AND CAPITAL

STRUCTURE: ANALYSIS BY FIRM SIZE-WISE, INCOME SIZE-WISE
AND SECTOR-WISE APPROACHES
The relation between profitability (P) and capital structure (CS) has been
a major concern in many of the studies done earlier. P has been considered as
one of the crucial factors determining the CS of firms, however, there are
different views regarding the nature of relation between P and CS. The works of
Myers (1984)1, Kester (1986) 2, Rajan and Zingales (1995) 3, Jonson (1998) 4,
Booth Collins et al. (2001) 5, Dogra and Gupta (2009) 6 and many others have
put forth different views about the relation between CS and P.
Food industry is one of the developing industries in India, which is in the
developing phase. Researches about the various financial variables are crucial for
its development. The prosperity of food industry would mean to enlighten the
life of many people in India as India basically has an agriculture based economy.
Hence, this study is a step forward hoping to reach such a goal.
This chapter is divided into two parts viz., part I and part II. Part I is a
preliminary analysis, which gives an outline of the relation between profit earned
by the firms and the mixture of debt capital and equity capital in the firms
capital structure. It also attempts to bring to light the impact of size, income and
sector differences on the relation that profit has on various constituents of CS.
Part II of the chapter deals with the analysis in identifying the variables that
influence the CS decision of the firms and in identifying the variables influencing
the P of the firms. The determinants are analysed by use of control variables viz.,
the size, income and sector differences to accentuate their impact on leverage
(LEV) and P.
90
Chapter IV
PART I
ANALYSIS OF CAPITAL STRUCTURE OF SELECTED FIRMS: FIRM SIZEWISE, INCOME SIZE-WISE, AND SECTOR-WISE APPROACHES
IV.1 Introduction
The analysis aims at exploring the nature of impact of profit before
interest taxes and depreciation (PBITD) on various constituents of CS in food
industry in India. The CS constitutes internal funds (equity capital), and external
funds (debt capital). The external funds have been classified as short term debt
(STD), long term debt (LTD), and total debt (TD) which is the sum of STD and
LTD. This part of the study is considered to be the base for the main analysis,
which focuses at revealing the nature of relation between P and LEV.
IV.2 Objectives of Part I
To study the nature of relation between PBITD and different constituents
of CS.
To analyse if size measured in terms of average sales and average income
(PBITD) influences the relation between PBITD and CS.
To analyse the inter-sector influence on the relation between PBITD and
CS.
IV.3 Hypotheses Development
A preliminary analysis is carried out to study the influence of profit
earned on different constituent of CS (internal funds viz., equity capital and
external funds viz., short term debt (STD), long term debt (LTD), and total debt
(TD) which is the sum of STD and LTD), which is considered as the base for the
core analysis, which focuses at revealing the nature of relation between P and
LEV. The impact of sales size, income size and sectoral differences are also
studied.
Ho1 = There is no significant relationship between profit earned and the size of
long term debt of the firms.

Ho = There is no significant relationship between profit earned and the size of
short term debt of the firms.
3
Ho = There is no significant relationship between profit earned and the size of
total debt borrowed of the firms.
2
91
Chapter IV
Ho4 = There is no significant relationship between profit earned and the size of
equity capital of the firms.

Ho = There is no significant impact of size of sales on the relation between
profit earned and the various constituents of capital structure of the
firms.
6
Ho = There is no significant influence of size of income on the relation between
profit earned and the various constituents of capital structure of the
firms.
7
Ho = There is no significant influence of sector differences on the relation
between profit earned and the various constituents of capital structure of
the firms.
5
IV.4 Research Methods

Sources of Data and Period of the Study
The study is based on secondary data which are collected from Centre for
Monitoring Indian Economy Pvt. Ltd. (CMIE) Prowess package. The required
data are collected for a period of 10 years on year to year basis ranging from
1999-2000 to 2008-2009. The data for the food products manufacturing firms
collected for this period are subject to limitations such as availability of
incorporation dates, continuous listing for 10 years and the sources of completion
of data for the years under study.
Research Methods Used for Analysis
Correlation co-efficient is extensively used to determine the one-to-one
relationship between PBITD and different constituents of CS. Simple ordinary
least square regression (OLS) is used to find if PBITD determines the proportion
of various constituents on CS in food industry in India. Linear trend line is also
used to give an overall picture about the relation between PBITD and CS in food
industry over the period under study.
IV.5 Overall Analysis of Relation between PBITD and Various Constituents of
CS
The overall trend analysis of selected 86 sample firms in food industry,

over a period of 10 years, shows (see chart IV. A) that there has been a gradual
rise in PBITD of firms of food industry after March 2005. The level of LTD and
STD and eventually TD has grown along with it. However, the equity capital
92
Chapter IV
remains more or less same without significant fluctuations, hence it reveals to be

unaffected by changes in PBITD of the firms.
Chart IV.A
Trend Line Showing Relation between PBITD and Various Constituents of CS
300
250
200
PBITD
150
Equity shares
100
Short term debt
50
Long term debt

Total debt
Mar-09
Sep-08
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
Sep-05
Mar-05
Sep-04
Mar-04
Sep-03
Mar-03
Sep-02
Mar-02
Sep-01
Mar-01
Sep-00
Mar-00
Source: Computed results based on compiled data collected from CMIE prowess Pvt. Ltd.
The overall correlation matrix (see table IV.1) gives a better picture about
the relationship between PBITD and the various constituents of CS. There exists
a significant positive correlation (at 1% level) between PBITD and various
constituents of CS (i.e., equity, STD, LTD, and TD).
To test whether PBITD is a good predictor of the various constituents of
CS simple regression (see table IV.2) has been run.
Table IV.1
Overall Correlation Matrix of Food Industry in India
Variables EQUITY
EQUITY
1
STD
LTD
TD
PBITD
.578
(.00)
.304
(.00)
.495
(.00)
.813
(.00)
STD
LTD
TD
PBITD
1
.723
(.00)
.947
(.00)
.776
(.00)
1
.906
(.00)
.490
(.00)
1
.702
(.00)
93
Chapter IV
**. Correlation is significant at 0.01 level (2-tailed).

Figures in parentheses denote p value.
PBITD has significant positive coefficients (at 1% level) with the various
constituents of CS (viz., equity, STD, LTD, and TD), which shows that the profit
earned by the firms has significant impact on determining the size of insiders as
well as outsiders funds in their CS. The Adj-R2 value is above 50% for STD and
equity, indicating that the model fit is good and PBITD is a better predictor of
STD and equity than that of the LTD and TD. The F-stat value is also significant
(at 1% level) for TD, LTD, STD, and equity indicating that the model fit is
significant. However, a closer view into the issue will give a better idea about the
impact of PBITD on insiders fund and outsiders fund. For the purpose, the
selected firms are classified using three control variables viz., the sales size-wise,
income size-wise and sector-wise.
IV.6 Sales Size- wise Analysis of Relation between PBITD and Various
Constituents of CS
Kester (1986)13 stated that there are no significant country differences in
LEV between U.S. and Japanese manufacturing firms after controlling for
characteristics such as growth, P, risk, size and industry classification. Rajan and
Zingales (1995)14 emphasized that the negative influence of P on LEV should
become stronger as firm size increases. Booth Collins et al. (2001)15, Panday
(2002)16, and Chen and Zhao (2004) 17also suggested that debt capital decreases
with higher P and SIZ in developing countries.
To study the impact of size the selected sample firms are grouped into
three size categories based on the quantum of sales. The firms with sales upto
Rs.100 crore are grouped as small size firms; the firms with sales above Rs.100
crore but upto Rs.500 crore are grouped as medium size firms; and firms with
94
Chapter IV
above Rs.500 crore are taken as large size firms, considering the average sales
over a period of 10 years as base for this purpose.
95
Chapter IV
Table IV.2
Regression on Total Debt, Long Term Debt, and Short Term Debt of Food Industry in
India (Overall)
Variables
TOTAL DEBT
Unstandardized Coefficients Standardized

Coefficients
B
Std. Error
Beta
(Constant)
PBITD
F value
R2
Adjusted R2
59.371
2.687
22.264
.297
(Constant)
PBITD
F value
R2
Adjusted R2
49.242
.871
12.674
.169
(Constant)
PBITD
F value
R2
Adjusted R2
10.265
1.816
12.042
.161
LONG TERM DEBT
SHORT TERM DEBT
EQUITY
.702
.490
.776
Sig.
2.667
.00
9.038
.00
81.688** (.00)
0.493
0.487
3.885
.00
5.148
.00
26.505** (.00)
0.24
0.23
.852
.39
11.292
.00
127.498** (.00)
0.603
0.598
(Constant)
8.316
.933
8.909
.00
PBITD
.160
.012
.813
12.802
.00
F value
168.893** (.00)
2
R
0.661
2
Adjusted R
0.657
Source: Computed results based on compiled data collected from CMIE prowess
Pvt. Ltd.
**.Significant at 0.01 level;*.Significant at 0.05 level
The trend line of small size firms, medium size and large size firms shows
(see chart IV. B) that the small size firms maintain relatively the same level of
PBITD over the years of study. There is not much of fluctuation in the PBITD of
small size firms, whereas, the trend line of medium size firms shows that there is
96
Chapter IV
a slight fall and rise in their PBITD, despite the fact that they could maintain
PBITD without much of flux. On the other hand, the large size firms PBITD
shows a precipitous rise after the year 2004-05.
Chart IV.B
Comparison of Trend line showing PBITD of Small Size, Medium Size, and
Large Size Firms
350
300
250
200
150
100
SMALL SIZE FIRMS

MEDIUM SIZE FIRMS
LARGE SIZE FIRMS
50
0
Pvt. Ltd.
The trend line showing TD of small size, medium size, and large size
firms exemplify (see chart IV. C) that the TD of small size firms has ascended
during the last few years of the period under study although their PBITD does
not show any such rise, while the medium size firms show that they have
endeavoured to increase their external borrowing over the years. In contrast, the
large size firms, which have steep rise in PBITD, also show steep rise upto the
year 2007-08 and a slight decrease in their external borrowing in the year 200708 although there is no fall in their PBITD in the year 2008-09.
97
Chapter IV
Chart IV.C
Comparison of Trend Line Showing Total Debt of Small Size, Medium Size
Firms, and Large Size Firms
1400
1200
1000
800
SMALL SIZE FIRMS
600
MEDIUM SIZE FIRMS
400
LARGE SIZE FIRMS
200
0
Pvt. Ltd.
IV.6.1 Correlation Co-efficient and Regression Results of Constituents of CS of

Small Size Firms
Table IV.3
Correlation Matrix of Constituents of CS of Small Size Firms of Food
Industry in India
Variables
EQUITY
STD
LTD
TD
PBITD
EQUITY
.427**
(.00)
.137
(.37)
.218
(.16)
.293
(.06)
STD
LTD
TD
PBITD
1
.780**
(.00)
.864**
(.00)
.495**
(.00)
1
.988**
(.00)
.344*
(.02)
1
.374*
(.014)
*. Correlation is significant at 0.05 level (2-tailed).
98
Chapter IV
The correlation matrix of small size firms (see table IV.3) shows that
PBITD has significant positive correlation (at 1% level) with STD (0.50) and (at
5% level) with LTD (0.34) and TD (0.37). There is no significant correlation
between PBITD and equity in case of small size firms. The regression result (see
table IV.4) shows that PBITD has significant positive coefficients with STD (at
1% level) and TD and LTD (at 5 % level). However, the model fit is not good in
all the cases, indicating that there are other variables predicting the constituents
of CS in small size firms.
Table IV.4
Regression Results on Total Debt, Long Term Debt, and Short Term Debt of Food
Industry in India (Small Size Firms)
Standardized
Variables
Unstandardized Coefficients Coefficients
B
Std. Error
Beta
t
Sig.
TOTAL DEBT
(Constant)
PBITD
F value
R2
Adjusted R2
20.320
4.764
9.805
1.847
(Constant)
PBITD
F value
R2
Adjusted R2
13.522
3.551
8.044
1.515
(Constant)
PBITD
F value
R2
Adjusted R2
6.224
1.522
2.216
.417
(Constant)
PBITD
F value
R2
Adjusted R2
7.553
.483
1.310
.247
LONG TERM DEBT
SHORT TERM DEBT
EQUITY
.374
2.073
2.579
.04
.014
6.654* (.014)
0.140
0.119
.344
1.681
2.343
.10
.02
5.491* (.02)
0.118
0.097
.495
2.808
3.645
.00
.00
13.283** (.00)
0.245
0.226
.293
5.767
1.959
.00
.057
3.838 (.057)
0.086
0.063
99
Chapter IV

Medium Size Firms
The correlation matrix of medium size firms (see table IV.5) shows that
PBITD has significant correlation with STD (0.67), LTD (0.73), and TD (0.78)
(at 1% level). The regression result (see table IV.6) shows that PBITD also has a
significant coefficient with STD, LTD, and TD (at 1% level). The Adj- R2 value,
indicating the model fit is also above 50% in case of TD (0.60) and LTD (0.51)
shows that PBITD is a good predictor of external funds for medium sized firms
in food industry in India. The medium sized firms external borrowings are thus
dependent to a greater extent on the profit earned by them.
Table IV.5
Correlation Matrix of Constituents of CS of Medium Size Firms of Food
Industry in India
Variables
EQUITY
EQUITY
STD
LTD
TD
PBITD
.467
(.00)
.551
(.00)
.584
(.00)
.349
(.05)
STD
LTD
TD
PBITD
1
.513
(.00)
.681
(.00)
.670
(.00)
1
.978
(.00)
.726
(.00)
1
.782
(.00)
Source: Computed results based on compiled data collected from CMIE

prowess Pvt. Ltd.
100
Chapter IV
Table IV.6
Regression Results on Total Debt, Long Term Debt, and Short Term Debt of
Food Industry in India (Medium Size Firms)
Variables
Unstandardized Coefficients
B
TOTAL DEBT
Std. Error
(Constant)
PBITD
F value
R2
Adjusted R2
43.095
3.832
16.684
.567
(Constant)
PBITD
F value
R2
Adjusted R2
24.688
3.032
15.712
.534
(Constant)
PBITD
F value
R2
Adjusted R2
18.407
.800
4.841
.164
(Constant)
PBITD
F value
R2
Adjusted R2
9.083
.116
1.696
.058
LONG TERM DEBT
SHORT TERM DEBT
EQUITY
Standardized
Coefficients
Beta
.782
.726
.670
.349
Sig.
2.583
.015
6.760
.00
45.702** (.00)
0.612
0.598
1.571
.12
5.680
.00
32.266** (.00)
0.527
0.510
3.802
.00
4.862
.00
23.644** (.00)
0.449
0.430
5.355
2.005
.00
.054
4.020 (.054)
0.122
0.091
Source: Computed results based on compiled data collected from CMIE

prowess Pvt. Ltd.
101
Chapter IV

Large Size Firms
The correlation matrix of large size firms (see table IV.7) shows highly
significant correlation between PBITD and equity (0.87) and significant
correlation between PBITD and STD (0.60). The regression result shows that
(see table IV.8) PBITD also has highly significant coefficient with equity (at 1%
level) and the Adj-R2 value is also above 70% (0.73), indicating that in large size
firms PBITD is the major predictor of the level of ownership capital. Thus, large
size firms use retained earnings for grabbing the investing opportunities.
Table IV.7
Correlation Matrix of Constituents of CS of Large Size Firms of Food Industry
in India
Variables
EQUITY
STD
LTD
TD
PBITD
EQUITY
STD
LTD
TD
PBITD
1
.384
(.22)
-.152
(.64)
.179
(.58)
.868**
(.00)
1
.706*
(.01)
.950**
(.00)
.601*
(.04)
1
.891**
(.00)
.154
(.63)
1
.452
(.14)

102
Chapter IV
Table IV.8
Food Industry in India (Large Size Firms)
Variables
TOTAL DEBT

Coefficients
B
Std. Error
Beta
(Constant)
PBITD
F value
R2
Adjusted R2
294.277
1.750
212.355
1.092
(Constant)
PBITD
F value
R2
Adjusted R2
185.129
.262
103.292
.531
(Constant)
PBITD
F value
R2
Adjusted R2
109.148
1.488
121.890
.627
(Constant)
PBITD
F value
R2
Adjusted R2
8.011
.162
5.674
.029
LONG TERM DEBT
SHORT TERM DEBT
EQUITY
Sig.
.452
1.386
1.603
.19
.14
2.571 (.14)
0.205
0.125
.154
1.792
.493
.10
.63
.243 (.63)
0.024
-0.074
.601
.895
2.375
.39
.03
5.643* (.03)
0.361
0.297
.868
1.412
.18
5.540
.00
30.695** (.00)
0.754
0.730
Pvt. Ltd.
**Significant at 0.01 level;*Significant at 0.05 level
103
Chapter IV
IV.7 Income Size- wise Analysis of Relation between PBITD and Various
Constituents of CS
Income earned is used as another control variable to get a better picture
about the impact of PBITD on the different constituents of CS. The firms within
the same income range are grouped together to analyse the impact of PBITD.
The firms are grouped into three sub-categories viz. low income size firms with
profit (PBITD) < Rs.10 crore; medium income size firms with profit > Rs.10
crore but < Rs.50 crore; high income size firms with income >Rs.50 crore. The
average income (PBITD) for the period of 10 years is considered as base for this
purpose.
The trend line of low income size firms shows (see chart IV. D) no
extraordinary rise or fall in their PBITD over the study period. While, the
medium income size firms show a gradual rise in PBITD the large income size
firms could put forth a steep rise in their PBITD. Thus, the results closely
correspond with that of the trend line of small size, medium size, and large size
firms based on its sales size.
Chart IV.D
Comparison of Trend line showing PBITD of Low Income Size, Medium Income
Size, and High Income Size Firms
450
400
350
300
250
200
150
100
50
LOW INCOME SIZE

FIRMS
MEDIUM INCOME SIZE
FIRMS
HIGH INCOME SIZE
FIRMS
Pvt. Ltd.
104
Chapter IV
Chart IV.E
Comparison of Trend line showing Total Debt of Low Income Size, Medium
Income Size, and High Income Size Firms
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
LOW INCOME SIZE

FIRMS
MEDIUM INCOME
SIZE FIRMS
HIGH INCOME SIZE
FIRMS
Pvt. Ltd.
The trend line showing TD of low income size firms shows (see chart IV.
E) that they maintain the same level of external borrowings over the study period
since, they sustain their PBITD at the same level without much enhancement.
The medium income size firms, however, maintain their borrowing level closer to
that of low income size firms although their PBITD shows an increase from the
year 2004-05. The TD of high income size firms shows that, as their PBITD rises,
they have also endeavoured to increase their TD to exploit opportunities
although there is a slight fall in TD in the year 2008-09.
Low Income Size Firms
The correlation matrix of low income size firms (see table IV.9) shows
that there exists a highly significant correlation between PBITD and equity (0.52)
as well as between PBITD and STD (0.45) (at 1% level). The regression results
(see table IV.10) show that PBITD of low income size firms has significant
coefficient with STD, as well as with equity (at 1% level). However, the model fit
with regard to all constituents of CS viz., STD, LTD, TD and equity is not good
as the Adj- R2 value remains below 50% (i.e., 0.18, -0.01, 0.02, and 0.26
respectively), which fact shows that the PBITD has a very little role in
determining the level of STD, LTD, TD and equity in case of low income size
firms.
105
Chapter IV
Table IV.9
Correlation Matrix of Constituents of CS of Low Income Size Firms of Food
Industry in India
Variables EQUITY
EQUITY
1
STD
.384
(.00)
.173
(.21)
.236
(.09)
.522
(.00)
LTD
TD
PBITD
STD
LTD
TD
PBITD
1
.717
(.00)
.829
(.00)
.447
(.00)
1
.984
(.00)
.095
(.49)
1
.190
(.17)

Table IV.10
Food Industry in India (Low Income Size Firms)
Variables
TOTAL DEBT
Std. Error
(Constant)
PBITD
F 2value
R
Adjusted R2
26.204
3.545
9.476
2.542
(Constant)
PBITD
F 2value
R
Adjusted R2
19.570
1.426
(Constant)
PBITD
F 2value
R
Adjusted R2
(Constant)
PBITD
F 2value
R
Adjusted R2
LONG TERM DEBT
SHORT TERM DEBT
EQUITY
Standardized
Coefficients
Beta
Sig.
.190
2.765
1.394
.00
.16
1.944 (.16)
0.063
0.018
7.706
2.067
.095
2.540
.690
.014
.49
.476 (.49)
0.009
-0.010
6.633
2.119
2.194
.589
.447
5.542
1.302
1.101
.295
.522
3.023
.00
3.600
.00
12.957** (.00)
0.199
0.184
5.032
.00
4.408
.00
19.429** (.00)
0.272
0.258
106
Chapter IV

Medium Income Size Firms
The correlation matrix of medium income size firms (see table IV.11)
shows that there exists a highly significant correlation between PBITD and LTD
(0.83) as well as between PBITD and TD (0.77). The regression results (see table
IV.12) show that the PBITD has highly significant coefficient with LTD (6.73) as
well as with TD (7.05). The model fit is also good with LTD as well as with TD,
recording Adj-R2 value 0.669 and 0.58 respectively, indicating that the profit
earned by medium income size firms has significant role in determining the
external borrowings of the firms.
Table IV.11
Correlation Matrix of Constituents of CS of Medium Income of Size Firms Food
Industry in India
Variables
EQUITY
STD
LTD
TD
PBITD
EQUITY
.280
(.20)
.390
(.07)
.484
(.02)
.319
(.14)
STD
LTD
TD
PBITD
1
.045
(.84)
.438
(.04)
.072
(.75)
1
.916
(.00)
.828
(.00)
1
.773
(.00)


High Income Size Firms
The PBITD of high income size firms (see table IV.13) shows a highly significant
correlation with internal funds (equity capital). The regression result (see table
IV.14) also shows that PBITD has highly significant coefficient with equity
(0.20). The Adj- R2 value is also high (0.77), indicating that the PBITD is a very
good predictor variable of internal funds in case of high income size firms.
107
Chapter IV
Table IV.12
Food Industry in India (Medium Income Size Firms)
Variables
TOTAL DEBT

Coefficients
B
Std. Error
Beta
(Constant)
PBITD
F 2value
R
Adjusted R2
-10.656
7.054
36.363
1.296
.773
(Constant)
PBITD
F 2value
R
Adjusted R2
-58.555
6.725
28.616
1.020
.828
(Constant)
PBITD
F 2value
R
Adjusted R2
49.006
.268
23.197
.827
(Constant)
PBITD
F 2value
R
Adjusted R2
7.774
.237
4.428
.158
LONG TERM DEBT
SHORT TERM DEBT
EQUITY
Sig.
-.293
.77
5.442
.00
29.620**(.00)
0.59
0.57
-2.046
.05
6.593
.00
43.469** (.00)
0.685
0.669
.072
2.113
.324
.04
.74
.105 (.74)
0.005
-0.045
.319
1.756
1.504
.09
.14
2.261 (.14)
0.102
0.057
Table IV.13
Correlation Matrix of Constituents of CS of High Income Size Firms of Food
Industry in India
Variables
EQUITY
STD
LTD
TD
PBITD
EQUITY
.376
(.28)
-.257
(.47)
.137
(.71)
.893
(.00)
STD
LTD
TD
PBITD
1
.667
(.04)
.947
(.00)
.557
(.10)
1
.871
(.00)
-.037
(.92)
1
.351
(.32)
108
Chapter IV
Table IV.14
Food Industry in India (High Income Size Firms)
Coefficients
Variables
B
Std. Error
Beta
t
Sig.
TOTAL DEBT
(Constant)
PBITD
F 2value
R
Adjusted R2
332.989
1.560
316.978
1.471
.351
1.051
1.060
.32
.32
1.124(.32)
0.123
0.014
(Constant)
PBITD
F 2value
R
Adjusted R2
272.486
-.070
146.054
.678
-.037
1.866
-.103
.09
.92
.011 (.92)
0.001
-0.124
(Constant)
PBITD
F 2value
R
Adjusted R2
60.503
1.630
185.308
.860
.557
.327
1.895
.75
.09
3.592 (.09)
0.310
0.224
(Constant)
PBITD
F 2value
R
Adjusted R2
-1.551
.195
7.477
.035
LONG TERM DEBT
SHORT TERM DEBT
EQUITY
.893
-.207
.84
5.604
.00
31.410** (.00)
0.797
0.772
IV.8 Sector-wise Analysis of Relation between PBITD and Various Constituents

of CS
Each sector within an industry may have different business environment
based on their nature of business (Lee and Kwok 1988)18. The sectoral
classification will certainly show the impact of these business environment and
nature of business on the relation between PBITD and different constituents of
CS. To study the impact of nature of business on the CS decision the firms are
further grouped into three categories based on sector.
109
Chapter IV
Since there is more number of sectors with firms of few in numbers, the
firms are combined and grouped into three sectors constituting related firms;
thereby the firms are classified into three sectors viz., Sector I, Sector II and
Sector III. Sector I constitutes 32 vegetable oil firms; Sector II constitutes 30
firms which include 9 firms of tea sector, 11 firms of dairy sector, and 10 firms of
sugar sector; Sector III constitutes 24 firms comprising of miscellaneous sectors,
which include coffee (1), cocoa products & confectionery (1), processed
/packaged foods (1), starches (2), marine food (3), poultry & meat product (1),
floriculture (2), milling products ( 3), and other agricultural products (10).
The trend line shows (see chart IV. F) that firms of sector III earn lowest
PBITD and of sector II earn highest PBITD, while PBITD of firms of sector I lies
between these two sectors. The PBITD of sector III shows a gradual rise after a
slight fall in the year 2001-02 without much of flux. The trend line of sector I
firms follow closely the line of sector III firms until 2005-06 and experienced a
steep increase thereafter, although there is a small fall in the year 2008-09, while
on the contrary, the PBITD of sector II has grown gradually upto the year 200607 followed by a slight fall in the year 2007-08 and a very steep increase in the
year 2008-09. However, all the sectors show a gradual increase in their PBITD
without much of fluctuations.
Chart IV.F
Comparison of Trend Line showing PBITD of Firms of Sector I, Sector II and
Sector III
120
100
80
60
SECTOR I
40
SECTOR II
20
SECTOR III
110
Chapter IV
The TD of sector III (see chart IV. G) grow gradually corresponding to

the trend line of their PBITD, while the TD of sector I firms, which has a PBITD
closer to that of the sector III, maintain TD level closer to that of sector II firms,
which has comparatively higher level of PBITD, which in turn reveals the fact
that sector I firms borrow more external capital for slight increase in their
PBITD. Firms of sector II, although have higher PBITD, maintain comparatively
lesser TD.
Chart IV.G
Comparison of Trend Line showing Total Debt of Firms of Sector I,
Sector II and Sector III
450
400
350
300
250
200
150
100
50
0
SECTOR I
SECTOR II
SECTOR III

Sector I
Table IV.15
Correlation Matrix of Constituents of CS of Sector-wise Firms of Food Industry
in India (Sector I)
Variables
EQUITY
STD
LTD
TD
PBITD
EQUITY
.467
(.01)
.448
(.010)
.464
(.01)
.669
(.00)
STD
LTD
TD
PBITD
1
.952
(.00)
.992
(.00)
.872
(.00)
1
.983
(.00)
.893
(.00)
1
.891
(.00)

111
Chapter IV
The correlation matrix of sector I (see table IV.15) shows that there exists
a highly significant correlation between PBITD and LTD (0.89), STD (0.87), TD
(0.89), and equity (0.67). The regression results (see table IV.16) also show that
the PBITD of firms under sector I has significant coefficient with LTD (3.19),
STD (4.53), TD (7.72), and equity (0.13) (at 1% level). The Adj-R2 value is above
70% for the models with dependent variables LTD (0.79), STD (0.75), and TD
(0.79), which indicates that PBITD is a very good predictor of the size of external
funds of firms belonging to the sector I.
Table IV.16
Food Industry in India (Sector I)
Coefficients
Variables
B
Std. Error
Beta
t
Sig.
TOTAL DEBT
(Constant)
PBITD
F value
R2
Adjusted R2
-7.784
7.720
32.736
.719
(Constant)
PBITD
F value
R2
Adjusted R2
7.118
3.194
13.407
.294
(Constant)
PBITD
F value
R2
Adjusted R2
-14.903
4.526
21.106
.464
(Constant)
PBITD
F value
R2
Adjusted R2
6.751
.134
1.236
.027
LONG TERM DEBT
SHORT TERM DEBT
EQUITY
.891
.893
-.238
10.736
.81
.00
115.254**(.00)
0.793
0.787
.531
.59
10.844
.00
117.596** (.00)
0.797
0.790
.872
-.706
9.763
.48
.00
95.317** (.00)
0.761
0.753
.669
5.461
4.934
.00
.00
24.349** (.00)
0.448
0.430
112
Chapter IV

Sector II
The correlation matrix of firms under sector II (see table IV.17) shows
that PBITD has highly significant correlation with TD (0.85), STD (0.97) and
equity (0.84). The regression result (see table IV.18) shows that PBITD has a
significant coefficient with TD (1.78), STD (1.41) and equity (0.16) (at 1% level).
The Adj-R2 value is above 50%, indicating that PBITD is crucial in determining
the level of TD (0.71), STD (0.95) and equity (0.70) for firms under sector II.
Table IV.17
Correlation Matrix of Constituents of CS of Sector-wise Firms of Food Industry
in India (Sector II)
Variables
EQUITY
STD
LTD
TD
PBITD
EQUITY
STD
LTD
TD
PBITD
1
.841
(.00)
.179
(.34)
.674
(.00)
.842
(.00)
1
.367
(.05)
.880
(.00)
.974
(.00)
1
.765
(.00)
.339
(.07)
1
.847
(.00)

Sector III
The correlation matrix (see table IV.19) shows that there exists a highly
significant correlation between PBITD and STD (0.83), LTD (0.84), and TD
(0.85). There also exists a significant correlation between PBITD and equity
capital (0.50). The regression result (see table IV.20) shows that PBITD has a
highly significant coefficient with STD (0.68), LTD (3.89), and TD (4.58).
PBITD has significant coefficient with equity (at 5% level). The Adj- R2 value is
113
Chapter IV
high with regard to STD (0.68), LTD (0.69), TD (0.71), indicating the fitness of
the model in these cases. Thus, PBITD is a good predictor of external funds for
firms belonging to sector III.
Table IV.18
Food Industry in India (Sector II)
Variables
TOTAL DEBT

Coefficients
B
Std. Error
Beta
(Constant)
PBITD
F value
R2
Adjusted R2
100.772
1.775
24.412
.210
(Constant)
PBITD
F value
R2
Adjusted R2
81.670
.363
22.123
.191
(Constant)
PBITD
F value
R2
Adjusted R2
19.539
1.411
7.195
.062
(Constant)
PBITD
F value
R2
Adjusted R2
11.245
.155
2.181
.019
.847
LONG TERM DEBT

.339
4.128
.00
8.435
.00
71.153**(.00)
0.718
0.708
3.692
1.904
SHORT TERM DEBT

.974
EQUITY
.842
Sig.
.00
.06
3.626 (.06)
0.115
0.083
2.716
.01
22.750
.00
517.552** (.00)
0.949
0.947
5.157
.00
8.256
.00
68.154** (.00)
0.709
0.698
114
Chapter IV
Table IV.19
Correlation Matrix of Constituents of CS of Sector-wise Firms of Food Industry in India

(Sector III)
Variables
EQUITY
STD
LTD
TD
PBITD
EQUITY
1
STD
.625
1
(.00)
LTD
.543
.889
1
(.01)
(.00)
TD
.563
.919
.998
1
(.00)
(.00)
(.00)
PBITD
.498
.834
.838
.850
1
(.013)
(.00)
(.00)
(.00)
Table IV.20
Food Industry in India (Sector III)
Variables
TOTAL DEBT
Std. Error
Standardized
Coefficients
Beta
(Constant)
PBITD
F 2value
R
Adjusted R2
7.600
4.577
13.711
.606
.850
(Constant)
PBITD
F 2value
R
Adjusted R2
4.574
3.893
12.225
.540
.838
(Constant)
PBITD
F 2value
R
Adjusted R2
3.026
.684
2.187
.097
.834
(Constant)
PBITD
F 2value
R
Adjusted R2
7.840
.147
1.234
.055
.498
LONG TERM DEBT
SHORT TERM DEBT
EQUITY
t
.554
7.554
Sig.
.58
.00
57.064**(.00)
0.722
0.709
.374
.71
7.206
.00
51.932** (.00)
0.702
0.689
1.384
.18
7.077
.00
50.084** (.00)
0.695
0.681
6.355
2.690
.00
.01
7.236* (.01)
0.248
0.213
115
Chapter IV
IV.9 Conclusion
The preliminary study about the relation between PBITD and the various
constituents of CS has put forth some important facts about the Food Industry in
India. The overall analysis shows that PBITD has highly significant positive
correlation with STD, LTD, TD and equity (see table IV.21). However the
regression result suggests that PBITD is a good determinant of STD and equity
where the Adj-R2 value is greater (0.60 for STD and 0.66 for equity). The
peculiar feature about the industry is that as their PBITD increases they rely
more on STD and equity capital rather than availing LTD, which would be easily
available as their profit increases. These firms, thus tend to reduce the risk
involved in fixed interest bearing commitments if they rely on outside capital.
Thus the hypothesis Ho1, Ho2, Ho3 and Ho4 are rejected in case of overall result of
food industry. A closer picture about the relation between PBITD and the
various constituents of CS can be got through categorized study and so the
industry is classified based on the sale size and income size. A sector wise
analysis is also conducted.
Table IV.21
Summary of Overall Results of the Relation between PBITD and the
Constituents of CS
Hypotheses
Ho = There is no
significant relationship
between profit earned
and long term debt
Ho2 = There is no
and short term debt
Ho3 = There is no
and total debt
Ho4 = There is no
and equity
1
Overall Results
Supporting Works
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
Myers (1984), Kester (1986),Titman and

Wessel (1988), Pinegar and Wilbricht
(1989), Barton and Gorden (1988), ,
Harris and Raviv (1991), Harries (1994),
Rajan and Zingales (1995), Jonson
(1998), Simerly and Li (2000), Booth
Collins et al. (2001), Fama and French
(2002) support relation between profit
earned and CS.
+ve**
Rejected
116
Chapter IV
IV.9.1 Sales Size-wise Analysis

In case of small size firms, PBITD has significant correlation with STD,
LTD, and TD. However, the Adj-R2 value is very low revealing that PBITD is not
a major determinant of STD, LTD and TD, there are other variables that
determine the size of outside borrowing in case of small size firms thereby it
leads to reject Ho1, Ho2, Ho3 in case of small size firms whereas, Ho4 is accepted
and there is no significant relation between equity and PBITD of small size firms
(see table IV.22).
The correlation result of medium size firms shows highly significant
correlation between PBITD and STD, LTD, TD. The regression result also
supports this (0.43 for STD, 0.51 for LTD, and 0.60 for TD). Thus, PBITD
determines the size of outside borrowings of medium size firms. Similar to small
size firms, Ho1, Ho2, Ho3 are rejected in case of medium size firms also whereas,
Ho4 is accepted and there is no relation between equity and PBITD in medium
size firms.
The regression result of large size firms show that PBITD is a very
important determinant of equity capital (Adj-R2 value is 0.73). The firms with
higher sales volume tend to maintain a higher equity size as their PBITD
increases. Hence, Ho2, Ho4 are rejected in case of large size firms and Ho1, Ho3 are
accepted.
Table IV.22
Summary of Sales Size-wise Analysis of the Relation between PBITD and the Constituents
of CS
Hypotheses
Relation between Predictors and Dependent Variables
Small Size Firms Medium Size Firms Large Size Firms
1
Ho = no significant
+ve*
+ve**
relationship between profit
Accepted
Rejected
Rejected
earned and long term debt
Ho2 = no significant
+ve**
+ve**
+ve*
Rejected
Rejected
Rejected
earned and short term debt
+ve*
+ve**
Accepted
Rejected
Rejected
earned and total debt
+ve**
Accepted
Accepted
Rejected
earned and equity
117
Chapter IV
Therefore, the hypothesis Ho5 that there is no significant impact of size of sales
on the relation between profit earned and the various constituents of capital
structure is rejected.
IV.9.2 Income Size-wise Analysis
Income size-wise analysis is a perfect alternative for analyzing the impact

of profit earned on different constituents of CS. The low income firms show that
PBITD has highly significant positive correlation with STD and equity. Thus the
hypotheses Ho2, Ho4 are rejected and the hypotheses Ho1, Ho3 are accepted.
However, the Adj-R2 value is too low to support the regression model that
PBITD is a significant determinant of the various constituents of CS. Thus,
similar to the case of small size firms, low income size firms also have other
factors influencing STD, LTD, TD and equity (see table IV.23).
PBITD is a significant predictor of LTD and TD in case of medium

income firms. There is a highly significant correlation between PBITD and LTD,
TD. The Adj-R2 value (0.67 for LTD and 0.58 for TD) also shows that PBITD
determines the level of LTD and TD over 50%. Thus the hypotheses Ho1, Ho3 are
rejected and the hypotheses Ho2, Ho4 are accepted, which fact result is just
contrary to the result of low income firms.
PBITD has highly significant correlation with equity capital in case of

high income firms. The regression result also supports the findings (Adj-R2 value
is 0.77) and PBITD is a major determinant of level of equity in high income
firms. Thus as their income increases the firms try to maintain higher size of
equity capital rather that outside debt. Ho4 is rejected and the Ho1, Ho2, Ho3 are
accepted in case as of high income firms.
Therefore, the hypothesis Ho6 that there is no significant impact of size
of income on the relation between profit earned and the various constituents of
capital structure is rejected.
118
Chapter IV
Table IV.23
Summary of Income Size-wise Analysis of the Relation between PBITD and the
Constituents of CS
Hypotheses
earned and equity

Low Income Size
Medium Income High Income Size
Firms
Size Firms
Firms
Accepted
+ve**
Rejected
Accepted
+ve**
Rejected
Accepted
Accepted
Accepted
+ve**
Rejected
Accepted
+ve**
Rejected
Accepted
+ve**
Rejected
IV.9.3 Sector-wise Analysis

The sector wise result show different results. PBITD of sector I has highly
significant positive correlation with all the constituents of CS. Thus the
hypothesis Ho1, Ho2, Ho3 and Ho4 are rejected. The result matches with that of the
overall result. The regression result also shows that the PBITD is a major
determinant of STD (Adj-R2 value is 0.75), LTD (Adj-R2 value is 0.79), TD (AdjR2 value is 0.79) and equity (Adj-R2 value is 0.43) (see table IV.24).
On the other hand, the correlation result of sector II shows that PBITD
of the firms have highly significant positive correlation with STD, TD and equity.
The regression result also supports for the same result, recording Adj-R2 value as
0.95, which fact shows that PBITD determines STD over 90% where as the AdjR2 value is 0.71 for TD and 0.70 for equity. Hence, the hypotheses Ho2, Ho3 and
Ho4 are rejected and the hypothesis Ho1 is accepted.
PBITD of sector III has significant positive correlation with all the
constituents of CS. Therefore, Ho1, Ho2, Ho3 and Ho4 are rejected. The Adj-R2
value shows the model fitness in case of STD (0.68), LTD (0.69), and TD (0.71),
which fact reveals that PBITD is one of the major determinants of external
borrowing in sector III.
119
Chapter IV
Table IV.24
Summary of Sector-wise Analysis of the Relation between PBITD and the
Constituents of CS
Hypotheses
earned and equity

Sector I
Sector II
Sector III
+ve**
Rejected
Accepted
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
+ve*
Rejected
Therefore, the hypothesis Ho7 that there is no significant influence of
sector differences on the relation between profit earned and the various
constituents of capital structure is accepted.
The overall result, thus, shows that PBITD is a major determinant of STD
and equity capital while there are other determinants which also predict the size
of LTD and TD. While PBITD is not a good determinant of any of the
constituents of the CS for small size firms, it explains above 50% of variation in
LTD and TD of medium size firms. PBITD is a major determinant of equity
capital in case of large size firms. The result of small size firms, medium size
firms and large size firms also matches with the results of low income size,
medium income size, and high income size firms respectively although there are
very little variations. Thus, SIZ has significant impact on the relation between P
and LEV as proved by Rajan and Zingales (1995)19, Booth Collins et al. (2001)20.
Hence, Ho5: there is no significant influence of size of sales on the relation
between profit earned and the various constituents of capital structure is
rejected. The hypothesis Ho6: there is no significant influence of size of income
120
Chapter IV
on the relation between profit earned and the various constituents of capital
structure is also rejected. Sector I shows that PBITD is the major determinant of
all the constituents of CS (viz., STD, LTD, TD and equity) with a high Adj. R2
value. However, Sector II depends more on STD, TD, and equity as their profit
(PBITD) increases rather than relying on LTD, while PBITD is the major
determinants of external borrowings of firms of Sector III. Therefore, it leads to
infer that sectoral classification has least impact on the relation between profit
earned and the various constituents of capital structure. Hence, Ho7 is accepted
for the reason that, as indicated by the findings of Barton, Hill, and Sundaram
(1989)21, sectoral differences does not have impact on the relation between
PBITD and CS.
The findings show that there is impact of profit earned on various
constituents of CS. The main study profoundly analyses the determinants of LEV
and P in Food Industry in India.
PART II
DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY: FIRM
SIZE- WISE, INCOME SIZE-WISE, AND SECTOR WISE APPROACHES
IV.10 Introduction
India has a large and diverse agriculture background, and is one of the
worlds leading producers of food articles. It is also a major consumer, with an
expanding population to feed. Agriculture and allied sectors accounted for 15.7%
of the GDP in 20091022. High food prices, resulting from the combined effects
of the weak 2009 monsoon and inefficiencies in the government's food
distribution system have shook Indian economy to the core. The expansion of
Food Industry in India would be the right alternate for this. Studies and
researches facilitate the advancement of the industry; hence the study is one step
ahead of all such attempts.
The preliminary analysis of food industry concentrated on finding if the
profit earned has any impact on the constituents of CS. As the results are
positive, an in depth study about the relation between P and LEV is carried out
in part II, which tries to analyze the determinants of LEV and P and also to
study if controlling variables such as sales size, income size and sectoral
classification influence the relation between the determinants and the dependent
121
Chapter IV
variables LEV and P. Many theoretical and empirical works have been carried out
to bring out the relation between P and CS. To illustrate a few, Myers (1984)23
introduced pecking order theory, which states an order which large firms follow
to escape the problem of informational asymmetry. Firms prefer internal funds
and when it gets exhausted they look in for debt finance rather than equity
finance. Major US industrial firms follow a financing hierarchy (pecking order)
and the managers consider the projected cash flow from asset to be financed as
the main criteria in governing financing decisions (Pinegar and Wilbricht
1989)24. The works of Titman& Wessels (1988)25, Kester (1986)26, Chang
(2003)27and many others have considered P as one of the determinants of CS.
Wald (1999)28 found that P was the single largest determinant of debt/asset
ratios in cross-sectional tests for the US, UK, Germany, France and Japan
(Myers 2001) 29, which shows how important P is in determining the CS of the
firms. The ability of the firm to earn consistent profit is the deciding factor of a
firms CS. Debt capacity depends on the future P and value of the firm; it may
be able to increase borrowing if it does well, or be forced to pay down debt if it
does poorly (Myers 2001) 30. The works of Myers (1984) 31, Kester (1986) 32,
Friend and Hasbrouch (1988)33, Friend and Lang (1988)34, Titman and Wessels
(1988)35, and Chen and Zhao (2004)36 give empirical evidences in support of the
negative relation between P & LEV. Long and Malitz (1985) 37 revealed that LEV
increases with increases in P but their result was insignificant. Though there are
varied views regarding the type of relation, the works give strong evidence that
there is a binding link between P& CS. Hence, the study is carried out to achieve
the objectives stated in chapter I.
IV.11 Objectives of Part II
The objectives of the study are to analyse the relationship between P and
LEV in general and to analyze the impact of non debt tax shield (NDTXSH),
collateral asset (COLASS), growth rate (GROW), size (SIZ), age (AG) and
volatility (VOL) on LEV in determining the CS of the firm.
The influence of sales size, income size and sectoral differences of firms
on the relationship between P and CS is also intended to be analyzed.
122
Chapter IV

There are different views about the relation between P and LEV. A few
worth mentioning are Myers (1984)38, Titman and Wessels (1988)39, Barton and
Gordon (1988)40, Johnson (1998)41, Booth Collins et al. (2001)42, and Fama and
French (2002)43 and they argued that there is a negative relationship between P
and LEV. In contrast to this, Pandey (2004)44 predicted a positive relation
between CS and P while Leland (1994)45, Kane, Marcus, and MacDonald
(1984)46, and Wiggins (1990)47 found that LEV ratio is invariant to changes in P.
Hence, it becomes essential to analyze the relation between P and LEV.
Other firm-level characteristics identified to influence LEV are size of the
firm (SIZ), asset structure (COLASS), growth (GROW), volatility (VOL), nondebt tax shield (NDTXSH) and age (AG). Modigliani and Miller (1958)48, and
Givoly Collins et al. (1992)49, in their study pointed out that the size of non-debt
corporate tax shields like deductions for depreciation and investment tax credits
may affect leverage, while Fisher, Heinkel, and Zechner (1989)50 study provided
evidences that tax benefits to debt are mostly negligible, which makes it
necessary to analyze whether there exists relationship between NDTXSH and
CS.
Titman and Wessels (1988)51, Balakrishnan and Fox (1993)52, studies
established that GROW rates were negatively related to long-term debt; while
Barton and Gordon (1988)53, work provided evidence in the contrary stating that,
GROW rate is positively correlated with debt and hence, the relation between
GROW and LEV is to be analysed. VOL in profit earned increases the risk
associated with the debt capital. Johnson (1997)54, Titman and Wessels, (1988)55
determined the impact of VOL on LEV as one of the determinants, while
Hutchinson and Michaelas (1998)56 and Titman and Wessels (1988)57, identified
opposite relation between collateralizable capital and debt level of the relation of
these variables with LEV. Hence, the hypotheses are:
Ho8 = There is no significant relationship between profitability and leverage of
the firms.
Ho = There is no significant relationship between non-debt tax shield and
leverage of the firms.
9
123
Chapter IV
Ho10 = There is no significant relationship between collateral assets and leverage
of the firms.
Ho = There is no significant relationship between growth and leverage of the
firms.
12
Ho = There is no significant relationship between volatility and leverage of the
firms.
11
Size influences the earning capacity and eventually the borrowing power
of the firms. The impact of size is studied in the works of Hutchinson and
Michaelas (1998)58, Booth Collins et al. (2001)59, Panday (2002)60, and Chen and
Zhao (2004)61. Therefore, the impact of SIZ of the firms on the relationship
between P and CS should be analyzed. Barton, Hill, and Sundaram (1989)62,
Baker (1973)63, and Lee and Kwok (1988)64 findings suggested that relativity of
business influences LEV. Thus, the hypotheses are:
Ho13= There is no significant influence of size in deviating the relationship
between profitability and capital structure of the firms.

Ho14= There is no significant influence of sectoral differences of firms in
deviating the relationship between profitability and capital structure.
IV.13 Research Methods

IV.13.1 Sources of Data
The study is based on secondary data, which are collected from CMIE
(Centre for Monitoring Indian Economy) Prowess package for a period of 10
years on year to year basis ranging from 1999-2000 to 2008-2009.
IV.13.1 Research Methods for Analysis
Descriptive statistics such as mean, median and standard deviation are
used to neutralize the fluctuation in the value of explained as well as explaining
variables. Correlation co-efficient is extensively used to study one-to-one
relationship between variables. Multiple regression is also used to determine the
various variables that influence the debt ratio / leverage in a firm. Besides, factor
analysis is also used to determine the factors influencing P. Different appropriate
ratios as stated in chapter I are also used to calculate individual relative
properties.
124
Chapter IV
IV.14 Regression on Determinants of LEV (Equation 1)

Regression equation I attempt to identify the determinants of LEV in food
industry in India. The dependent variable LEV is studied under three heads viz.,
short term debt (LEV_STD), long term debt (LEV_LTD) and total debt
(LEV_TD). Hutchinson and Michaelas (1998)65, in their study analyzed CS in
terms of short term debt, long term debt and total debt. Titman and Wessels
(1988)66 also analyzed the implications with regard to different types of debt
instruments viz. short-term, long-term and convertible debt rather than an
aggregate measure of total debt, (the descriptions of various ratios of independent
nature are given in table IV.25) hence the equation is:
LEV = + 1 VOL + 2 COL ASS+ 3 NDTXSH + 4 P + 5 SIZ + 6 AG + 7
GROW +
Table IV.25
Ratios of Independent Variables Determining LEV
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
Description
Inference
Short term debt / Book value of equity A high value denotes high leverage in terms
of short term debt and vice versa
Long term debt / Book value of equity A high value denotes high leverage in terms
of long term debt and vice versa
Total debt / Book value of equity
A high value denotes high leverage in terms
of total debt and vice versa
Standard deviation of earnings before A high value denotes greater volatility in
earnings from the assets invested and vice
interest, taxes and depreciation
(EBITD) / Total Assets
versa
Ratio of Property, Plant and
A high value denotes higher share of fixed
asset to total asset, which implies greater
Equipment / Total Assets
share of assets is invested for increasing
earning and vice versa
Ratio of the sum of depreciation and A high value denotes a higher non debt tax
amortization / Total Assets
shield and vice versa
PBITD / Fixed Assets
A high value denotes higher profitability in
terms of fixed assets
Logarithm of Sales over Years
Turnover adjusted for fluctuation over years
Total number of years from the date of The number of years the firm has been
incorporation
carrying out business
Compounded annual growth rate
The growth of total asset over years
(CAGR) of total assets
Source: Compiled from secondary sources
125
Chapter IV
IV.15 Overall Analysis of Determinants of LEV

The overall analysis constitutes analysis of 86 firms to show an overall
picture about the industry. The trend analysis over a period of 10 years (see chart
IV.H) shows that there is a steep rise in LEV_TD with slight rise in P from the
year 2005-06 to 2007-08, thereafter there is a fall in P as well as a fall in
LEV_TD.
The overall descriptive statistics (see table IV. 26) shows that LEV_TD
has the highest mean value. The deviation from the mean value is also high. The
other dependent variables, LEV_LTD and LEV_STD also have higher standard
deviation, indicating that the size of leverage on total borrowings vary highly
within the industry. NDTXSH also has high standard deviation, however P and
GROW have low standard deviation, indicating that there is no much of
variation in the industrys P and GROW although there is a high deviation in
CS. The correlation matrix (see table IV. 27) also shows a clear picture of the
relation between P and LEV.
Chart IV. H
Overall Trend Line Showing Relation between P and LEV_TD
18
17.019
16.3
16
14
12
10
9.028
8
6
4
2
11.984
9.348
5.83
6.354
7.452
6.78
0.228 0.24 0.203
9.716
P
LEV_TD
0.23
0.272
0.232
0.284 0.343 0.45
0.395
126
Chapter IV
Table IV. 26
Overall Descriptive Statistics of Determinants of LEV of Food Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COL ASS
NDTXSH
P
SIZ
AG
GROW
N
86
86
86
86
86
86
86
86
86
86
Minimum Maximum
.036
41.859
.089
48.860
.186
69.506
.009
.759
.034
.836
-4.890
16.005
-.349
1.389
-.905
3.677
13
53
-.174
.463
Mean
3.899
6.101
9.981
.085
.435
.284
.290
1.819
24.12
.080
Std. Deviation
6.081
8.289
12.790
.115
.185
2.030
.288
.903
10.010
.126
The correlation matrix shows (see table IV. 27) that there exists a highly
significant (at 1% level) positive correlation between GROW and LEV_STD
(0.343), LEV_LTD (0.54), and LEV_TD (0.51). SIZ also has highly significant
positive correlation with LEV_STD (0.50), LEV_LTD (0.43), and LEV_TD
(0.51). The AG of the industry has highly significant positive correlation with
LEV_STD (0.30), LEV_TD (0.29) and significant correlation (at 5% level) with
LEV_LTD (0.22).
P has significant positive correlation with LEV_STD (0.50), and

LEV_TD (0.51), which fact indicates that the industry is a growing industry and
does not have sufficient retained earnings to backup their investment

opportunities and still they rely on external borrowings and the pecking order
hypothesis (Myers 1984) is not very much relevant to the industry. However, the
size-wise analysis shows a contradictory result, which fact shows that VOL as
well as COLASS have significant negative correlation with LEV_TD (-0.23) and
with LEV_STD (-0.23) respectively.
127
Chapter IV
Table IV. 27
Overall Correlation Matrix of Determinants of LEV of Food Industry in India
LEV
LEV LEV
Variables _STD
_LTD _TD VOL COLASS NDTXSH P
LEV_STD
1
(.00)
LEV_LTD .577
1
(.00)
LEV_TD
.849
.921
1
(.00) (.00)
VOL
-.227
1
(.04)
COLASS
-.226
.218
1
(.04)
(.04)
NDTXSH
1
P
SIZ
AG
GROW
.249
(.02)
.503
(.00)
.302
(.01)
.343
(.00)
.427
(.00)
.218
(.04)
.537
(.00)
.241
(.03)
.514
(.00)
.285
(.01)
.509
(.00)
-.299
(.01)
-.348
(.00)
-.478
(.00)
-.455
(.00)
-.246
(.02)
SIZ AG GROW
1
.480
1
(.00)
.237
(.03)
.357 .558
(.00) (.00)
1
1
The overall regression results show that (see table IV. 28) SIZ (2.65) and
AG (0.13) have highly significant positive coefficients with LEV_STD. The AdjR2 is 0.24, indicating that the predictor variables determine changes in
LEV_STD only to the extent of 20%. However, the F-stat value (4.86) is highly
significant, revealing that the variability in the predictor variables explains a
statistically significant portion of variability in the dependent variable,
LEV_STD. GROW has highly significant positive coefficient with LEV_LTD
(30.20) and LEV_TD (model 1 is 35.21 & model 2 is 35.23). SIZ has significant
128
Chapter IV
positive coefficient (4.59) with LEV_TD in model 1 and highly significant

coefficient (4.48) with LEV_TD in model 2 after removing predictor variables
viz., VOL, COLASS, NDTXSH. AG has significant positive coefficient with
LEV_TD in models 1 (0.27) & 2 (0.27). The Adj-R2 value is, however, low (30%)
which indicates that the model fit is not quite good for the overall industry.
The KaiserMeyer-Olkin measure (see table IV. 29) is nearly 0.6,
indicating that factor analysis shows a fair result and the Barletts test of
sphericity is significant (at 1% level), indicating that the correlation matrix is not
an identity matrix, thus, the result of factor analysis would be fair and reliable.
Table IV. 28
Overall Results of Regression on Determinants of LEV of Food Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat
Un-standardized Coefficients Beta Value

LEV in terms of
LEV in terms of LEV in terms of total
short term debt
long term debt
debt
Model 1 Model 2
-3.405
-4.128
-7.400
-6.430
(0.24)
(0.28)
(0.20)
(0.06)
-1.137
1.429
0.327
(0.83)
(0.84)
(0.97)
-1.583
3.702
1.881
(0.68)
(0.46)
(0.80)
-0.050
-.064
-0.117
(0.86)
(0.86)
(0.84)
-1.211
-2.123
-3.334
-3.767
(0.63)
(0.52)
(0.50)
(0.40)
2.648**
1.966
4.590*
4.477**
(0.00)
(0.09)
(0.01)
(0.00)
0.134*
.131
.265*
0.272*
(0.03)
(0.11)
(0.03)
(0.02)
5.233
30.201**
35.211** 35.234**
(0.36)
(0.00)
(0.00)
(0.00)
0.304
0.349
0.380
0.379
0.241
0.290
0.325
0.349
4.857**
5.964**
6.838** 12.373**
(.00)
(.00)
(.00)
(.00)
Pvt. Ltd.
Note: Figures in parentheses are p values;**Significant at 0.01 level;*Significant
at 0.05 level
129
Chapter IV
Table IV. 29
KMO and Bartlett's Test of Determinants of LEV of Food Industry in India
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.585
894.208
45
.000
Table IV. 30
Overall Factor Analysis of Determinants of LEV of Food Industry in India
Factor
Eigen value
Factor 1
3.893
Factor 2
1.469
Factor 3
1.146
Variable
convergence
LEV_TD
LEV_LTD
LEV_STD
GROW
AG
P
COLASS
SIZ
NDTXSH
VOL
Factor
loadings
.969
.904
.810
.558
.369
.816
-.810
.667
-.809
.566
For factor analysis (see table IV. 30), the variables are grouped into three
factors, showing high level of correlation among the variables within the factor.
Factor 1 constitutes LEV_TD, LEV_LTD, LEV_STD, GROW, and AG. Factor
2 constitutes P, COLASS, SIZ, and factor 3 constitutes NDTXSH and VOL.
IV.16 Sales Size-wise Analysis of Determinants of LEV
Many empirical works were attempted to study the impact of SIZ on CS
and P. Rajan and Zingales (1995) 67 pointed out that the negative influence of P
on LEV increases with the size of the firm. Profitable large size firms have
relatively less debt when compared to that of the smaller and riskier firms. Small
size firms tend to use significantly more short term debt than that of the larger
130
Chapter IV
firms (Titman and Wessels 1988) 68. A size-wise analysis is carried out to study
the impact of size on the various predictor variables on the dependent variables.
In order to test the same the firms with sales turnover of < Rs.100 crore are
grouped as small size firms, the firms with sales turnover of > Rs.100 crore but
< Rs.500 crore are considered as medium size firms, and firms with sales
turnover of >Rs.500 crore are considered as large size firms.
IV.16.1 Analysis of Small Size Firms
The trend analysis of small size firms shows (see chart IV.I) that there is a
steep rise in LEV_TD after the years 2005-06 till 2007-08, thereafter, there has
been a sudden fall, which matches with the overall trend line due to the impact
of global meltdown in 2007.
Chart IV.I
Trend Line Showing Relation between P and LEV_TD of Small Size Firms
12
10.309
10
8
7.945
6
3.608
4.135
4.301
4
2
0
3.395
3.589
0.1041
0.124
0.135
5.689
4.307
LEV_TD
4.367
0.156
0.148
0.368
0.142
0.133
0.257
0.314
Pvt. Ltd.
Small size firms include 43 firms with average sales turnover < Rs.100
crore. The descriptive statistics shows (see table IV. 31) that the standard
deviation is high among the small size firms with respect to LEV_LTD when
131
Chapter IV
compared to LEV_STD as well as LEV_TD. However, the P and GROW have

lesser deviations, indicating that the small size firms have more or less same
profit earning capacity and the GROW is also closely related irrespective of the
level of deviation in LEV.
Table IV. 31
Descriptive Statistics of Determinants of LEV of Small Size Firms of Food
Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
43
43
43
43
43
43
43
43
43
43
Minimum Maximum
.036
10.217
.089
48.860
.186
57.282
.009
.759
.034
.836
-4.890
16.005
-.278
1.008
-.905
1.945
15
53
-.174
.463
Mean
1.526
3.635
5.164
.113
.478
.420
.194
1.154
22.21
.0137
Std. Deviation
2.382
8.612
1.049
.150
.199
2.851
.258
.768
9.339
.109
The correlation results (see table IV. 32) show the relation between the
predictor variables and the dependent variables. GROW has highly significant
correlation with the dependent variables LEV_LTD (0.64) and LEV_TD (0.61)
and has significant correlation with LEV_STD (0.38). AG has highly significant
positive correlation with LEV_STD (0.52), LEV_LTD (0.40) and LEV_TD
(0.45). SIZ has significant positive correlation with LEV_STD (0.36), LEV_LTD
(0.32) and LEV_TD (0.34), hence GROW, AG, SIZ influence the size of LEV of
small size firms. P has an insignificant positive relation with LEV while VOL,
COLASS, and NDTXSH have insignificant negative correlation with LEV.
132
Chapter IV
Table IV. 32
Correlation Matrix of Determinants of LEV of Small Size Firms of Food Industry
in India
Variables
LEV LEV LEV

_STD _LTD _TD
LEV_STD
LEV_LTD
.738**
VOL COLASS NDTXSH
SIZ
AG
GROW
(.00)
LEV_TD
.832** .988**
(.00) (.00)
VOL
COLASS
NDTXSH
1
-.399**
(.00)
SIZ
AG
GROW
.361* .320*
.344*
-.509**
.380*
(.017) (.03)
(.02)
(.00)
(.01)
.517** .400**
.446**
(.00) (.00)
(.00)
.375* .642**
.612** -.370*
.417**
(.01) (.00)
(.00)
(.00)
1
1
.015

133
Chapter IV
Table IV. 33
Results of Regression on Determinants of LEV of Small Size Firms of Food
Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat

LEV in terms of
LEV in terms of LEV in terms of total
short term debt
long term debt
debt
Model 1 Model 2
-1.941
-6.759
-8.716
-7.224
(0.25)
(0.22)
(0.20)
(0.08)
.166
8.864
9.038
9.560
(0.94)
(0.25)
(0.33)
(0.28)
-.405
2.740
2.365
(0.83)
(0.67)
(0.76)
-.027
.033
.007
(0.81)
(0.93)
(0.98)
.814
3.734
4.554
4.079
(0.55)
(0.41)
(0.41)
(0.43)
.710
.882
1.596
1.324
(0.18)
(0.61)
(0.45)
(0.47)
.119**
.256*
.375*
.374**
(0.00)
(0.03)
(0.01)
(0.00)
3.149
46.258**
49.405** 49.991**
(0.37)
(0.00)
(0.00)
(0.00)
0.406
0.513
0.507
0.506
0.287
0.416
0.409
0.439
3.420**
5.277**
5.147** 7.578**
(0.00)
(.00)
(.00)
(.00)
Note: Figures in parentheses are p values;**Significant at 0.01 level;*Significant at 0.05

level
The regression result reveals whether the explaining variables, GROW,

AG, and SIZ are good predictors of LEV. AG and GROW have highly significant
positive coefficient (see table IV. 33) with LEV_STD (0.12) and with LEV_LTD
(46.25) respectively, and LEV_TD (model 1 (49.41) model 2 (49.99)). AG has
significant positive coefficient with LEV_TD in models 1(0.38*) & 2 (0.37**)
134
Chapter IV
after removing variables COLASS and NDTXSH. The Adj-R2 value is low for
LEV_STD (0.29) and above 40% for LEV_LTD (0.42), and LEV_TD (0.45).
Thus, the regression model fit is above 40% in case of small size firms. The F-stat
is highly significant in all the models revealing that the variability in LEV is
significant with the variability in the predictor variables.
Kaiser-Meyer-Olkin measure reveals (see table IV. 34) about 60% (0.59),
indicating that the factor analysis for the data would be appropriate for small size
firms. The Barletts test also shows a highly significant 2 value (583.73),
affirming that the correlation matrix is not an identity matrix and factor analysis
can be conducted on it.
Table IV. 34
KMO and Bartlett's Test of Determinants of LEV of Small Size Firms of Food
Industry in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.587
583.731
45
.000
The results of factor analysis (see table IV. 35) shows that the predictor
variables can be reduced to 3 factors; factor 1 constituting of LEV_TD,
LEV_LTD, LEV_STD, AG and GROW; factor 2 constituting COLASS, SIZ and
P; and factor 3 constituting VOL and NDTXSH.
Table IV. 35
Factor Analysis of Determinants of LEV of Small Size Firms of Food Industry in
India
Factor
Eigen value
Factor 1
3.868
Factor 2
1.610
Factor 3
1.265
Variable convergence
LEV_TD
LEV_LTD
LEV_STD
AG
GROW
COLASS
SIZ
P
VOL
NDTXSH
Factor loadings
.943
.917
.838
.657
.631
-.794
.776
.742
.766
-.732
135
Chapter IV
IV.16.2 Analysis of Medium Size Firms

The trend line of medium size firms shows (see chart IV.J) a gradual rise
in LEV_TD over the years with the rise in P unlike the trend in the case of small
size firms, which fact shows that they are quite stable. The fall from the year
2007-08 to 2008-09 is also gradual, explaining their position in handling
situations.
Chart IV.J
Trend Line Showing Relation between P and LEV_TD of Medium Size Firms
25
19.62
20
19.399
15.691
15
10
5
6.471 7.243
0.295
8.155 8.888
0.205
0.298
10.792
0.352
0.262
11.943
12.772
P
LEV_TD
0.319
0.281
0.339
0.304
0.336
Medium size firms include 31 firms whose average turnover is > Rs.100
crore but < Rs. 500 crore. The firms show (see table IV. 36) higher standard
deviation with regard to LEV. AG also shows a higher standard deviation,
indicating that the firms belonging to different age groups have average turnover
falling in the same range, which in turn, shows that the AG of the firm is not
related to their prosperity. P and GROW show a low deviation, which indicates
that the firms with different sizes of LEV have more or less the same level of P
and GROW.
The correlation matrix (see table IV. 37) of medium size firms shows that
SIZ has highly significant positive correlation with LEV_LTD (0.55**) and
significant positive correlation (0.45*) with LEV_TD, while VOL has significant
negative correlation (-0.37*) with LEV_TD. AG has significant positive
correlation (0.39*) with LEV_STD.
136
Chapter IV
Table IV. 36
Descriptive Statistics of Determinants of LEV of Medium Size Firms of Food
Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
31
31
31
31
31
31
31
31
31
31
Minimum Maximum
.640
25.727
.804
26.226
1.638
42.223
.009
.234
.099
.711
.009
2.406
-.349
.826
1.603
2.686
13
48
-.054
.422
Mean
4.121
8.032
12.097
.062
.434
.191
.299
2.292
24.26
.131
Std. Deviation
4.639
6.513
9.501
.058
.159
.491
.217
.217
9.143
.105
The regression run to analyze if the predictors have significant coefficients

with the dependent variables shows (see table IV. 38) that the model is fit to the
extent of 40% (Adj-R2 value for model 3 is 0.41) in case of LEV_LTD,
LEV_STD (Adj-R2 value for model 2 is 0.17) and LEV_TD (0.245) the model fit
is only about 20%. AG has a significant coefficient (0.21) with LEV_STD in
model 2 after removing COLASS, NDTXSH and GROW from the predictor
variables. SIZ has highly significant positive coefficient with LEV_LTD (18.32)
in model 2 after removing the predictor variables viz., VOL, NDTXSH and P. It
also has a highly significant positive coefficient (18.99) with LEV_LTD in model
3 after removing the predictor variable COLASS in addition to VOL, NDTXSH
and P. GROW has a significant positive coefficient with LEV_LTD in models 2
(21.32) & 3 (22.74). AG also has a significant coefficient with LEV_LTD in
model 3 (0.23) while SIZ alone has significant positive coefficient (19.37) with
LEV_TD, however, the other predictor variables have insignificant coefficients
with LEV_TD. The F-stat value is significant in all the three models of
LEV_LTD, indicating that the variability of the predictor variables is
significantly related to the variability in LEV.
137
Chapter IV
Table IV. 37
Correlation Matrix of Determinants of LEV of Medium Size Firms of Food
Industry in India
Variables
LEV LEV LEV

_STD _LTD _TD
LEV_STD
LEV_LTD
.442*
VOL COLASS NDTXSH
SIZ
AG GROW
(.013)
LEV_TD
.790** .898**
(.00)
(.00)
-.366*
VOL
(.04)
COLASS
NDTXSH
1
-.519**
(.00)
.553**
SIZ
AG
.451*
-.406*
(.00) (.011)
(.02)
.385*
(.03)
GROW
.379*
(.03)

138
Chapter IV
Table IV. 38
Results of Regression on Determinants of LEV of Medium Size Firms of Food
Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat

LEV in terms of short
LEV in terms of long term debt
term debt
Model 1 Model 2 Model 1 Model 2 Model 3
-6.349
-7.742
-42.955
-43.570
-44.124
(0.58)
(0.46)
(0.00)
(0.00)
(0.00)
-17.555
-18.724
-5.205
(0.28)
(0.22)
(0.78)
2.564
10.143
4.602
(0.74)
(0.28)
(0.47)
-.648
.504
(0.72)
(0.81)
5.580
3.170
5.331
(0.32)
(0.39)
(0.42)
2.415
3.058
17.282 18.316** 18.989**
(0.58)
(0.45)
(0.00)
(0.00)
(0.00)
.174
.209*
.148
0.199
0.233*
(0.13)
(0.02)
(0.28)
(0.10)
(0.04)
-6.546
15.342
21.324* 22.740*
(0.53)
(0.22)
(0.03)
(0.02)
0.295
0.278
0.495
0.475
0.464
0.080
0.167
0.342
0.394
0.405
1.374
2.503
3.226*
5.871**
7.795**
(0.26)
(0.06)
(0.01)
(0.00)
(0.00)
LEV in terms of
total debt
-48.203
(0.03)
-22.799
(0.44)
12.095
(0.40)
-.208
(0.95)
10.844
(0.30)
19.368*
(0.02)
.322
(0.13)
8.125
(0.67)
0.421
0.245
2.394
(0.054)

level
The Kaiser-Meyer-Olkin measure (see table IV. 39) is only 0.42, which is
quite lower than the minimum level 0.60, hence the factor analysis results may be
only illusionary results. However, the Bartletts Test of sphericity is highly
significant (258.81), proving that the correlation matrix is not an identity matrix
encouraging performing factor analysis on the variables in case of medium size
firms.
139
Chapter IV
Table IV. 39
KMO and Bartlett's Test of Determinants of LEV of Medium Size Firms of Food
Industry in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.420
258.808
45
.000
Hence, factor analysis has been carried out and the variables are grouped
into 4 factors. Factor 1 (see table IV. 40) constitutes LEV_STD, LEV_TD and
AG; factor 2 constitutes SIZ, VOL, LEV_LTD; factor 3 constitutes COLASS, P,
and NDTXSH, and factor 4 constitutes only one variable, viz., GROW as it is
not inter related with the other variables so as to constitute a factor.
Table IV. 40
Factor Analysis of Determinants of LEV of Medium Size Firms of Food Industry
in India
Factor
Eigen value
Factor 1
3.126
Factor 2
1.855
Factor 3
1.494
Factor 4
1.155
LEV_STD
LEV_TD
AG
SIZ
VOL
LEV_LTD
COLASS
P
NDTXSH
GROW
Factor loadings
.813
.765
.756
.870
-.686
.588
.842
-.722
-.647
.935
IV.16.3 Analysis of Large Size Firms

The trend line of large size firms shows (see chart IV.K) that they are in a
better position than that of the medium size and small size firms. The LEV_TD
shows a steady rise without any sudden fall, hence the external variables do not
influence the size of external borrowing of large size firms as they are able to
raise capital at all times.
140
Chapter IV
Chart IV.K
Trend Line Showing Relation between P and LEV_TD of Large Size Firms
45
40
35
34.346
38.232
30
25
21.176
20
13.901
15
10
5
0
12.899
14.66
15.627
0.471
0.44
24.97
P
LEV_TD
0.705
0.479
0.478
0.502
20.725
21.205
0.458
1.028
0.75
0.836
Table IV. 41
Descriptive Statistics of Determinants of LEV of Large Size Firms of Food
Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
12
12
12
12
12
12
12
12
12
12
Minimum Maximum
3.277
41.859
.354
27.648
4.242
69.506
.012
.111
.165
.482
.009
.158
.274
1.389
2.684
3.677
16
51
.057
.381
Mean
11.830
9.944
21.774
.0426
.283
.034
.615
2.984
30.58
.182
Std. Deviation
1.071
9.034
1.850
.029
.104
.042
.330
.284
12.384
.108
The descriptive statistics of large size firms (see table IV. 41) show that
the standard deviation is very high in case of LEV_LTD as well as in AG, thus
the firms grouped under large size firms have varied level of LTD and the AG of
the firms also varies, which prove that the firms of different AG are grouped as
large size firms. However, P and GROW have comparatively low standard
deviation.
141
Chapter IV
The correlation matrix (see table IV. 42) of the large size firms shows that
SIZ has significant positive correlation (0.60) with LEV_STD while the other
predictor variables do not have significant correlation with the dependent
variable, LEV. P shows an insignificant negative correlation with LEV unlike the
case of small size and medium size firms. The regression result (see table IV. 43)
of large size firms show that SIZ has significant positive coefficient (34.45) with
LEV_STD. The Adj-R2 value (0.40) also supports that the regression model is
40.4% fit in case of LEV_STD, although the Adj-R2 value is insignificant for the
other cases.
Table IV. 42
Correlation Matrix of Determinants of LEV of Large Size Firms of Food Industry
in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
LEV LEV LEV

_STD _LTD _TD VOL COLASS NDTXSH
1
.756
1
(.00)
.947 .925
(.00) (.00)
COLASS
AG
AG GROW
P
SIZ
SIZ
.594
(.04)
NDTXSH
.597
(.04)
GROW
1
.626
(.02)
1
1
1
.593
(.04)
1
1

142
Chapter IV
Table IV. 43
Results of Regression on Determinants of LEV of Large Size Firms of Food
Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat

LEV in terms of
LEV in terms of
LEV in terms of
short term debt
long term debt
total debt
-88.497
-49.500
-137.998
(0.06)
(0.27)
(0.10)
140.687
248.704
389.391
(0.45)
(0.27)
(0.30)
-73.727
-92.454
-166.181
(0.29)
(0.25)
(0.23)
132.407
192.739
325.146
(0.33)
(0.23)
(0.24)
-11.683
-2.411
-14.094
(0.32)
(0.85)
(0.52)
34.445*
22.701
57.146
(0.03)
(0.14)
(0.05)
34.445
-0.155
0.026
(0.59)
(0.68)
(0.96)
52.127
37.547
89.675
(0.16)
(0.34)
(0.20)
0.783
0.604
0.724
0.404
-0.089
0.241
2.064
0.872
1.498
(0.25)
(0.59)
(0.36)

level
The KMO result shows that the coefficient of correlation is not positive
definite and so factor analysis is not carried out.
IV.17 Income-wise Analysis of Determinants of LEV
There are different views about the impact of income earned on CS. To
illustrate, more profitable firms tend to issue more debt as debt capital may be
available to them at a cheaper rate (Chen and Zhao 2004)69, however it is
143
Chapter IV
recommendable that more profitable firms should hold less debt because higher
profit generates more internal funds (Bevan and Dabnolt 2002)70. The firms
within the same income size range are grouped together to analyze the impact of
PBITD. The firms are grouped into three sub-categories viz., low income size
firms with profit (PBITD) < Rs.10 crore; medium income size firms with profit
> Rs.10 crore but < Rs.50 crore; high income size firms with income >Rs.50
crore. The average income (PBITD) for the period of 10 years under study is
considered for this purpose.
IV.17.1 Analysis of Low Income Size Firms
The low income size firms trend line shows (see chart IV.L) that there is
a steep rise in the level of external borrowings with a slight rise in P. However,
there is a steep fall in LEV_TD after the year 2007-08. The trend line is similar
to that of the small size firms, which fact shows the instability in case of low
income size firms.
Chart IV.L
Trend Line Showing Relation between P and LEV_TD of Low Income Size
Firms
12
10
9.679
8
6.948
6
4
4.904
4.047
3.64
4.437
4.265
2
0
0.111
0.119
5.304
0.211
4.782
0.151
0.174
0.133
7.465
LEV_TD
0.238
0.137
0.38
0.3
The descriptive statistics of 54 low income size firms show (see table IV.
44) that the standard deviation for LEV_STD, LEV_LTD, and LEV_TD is very
high and AG also shows a high level of deviation. The firms of different
incorporation years fall under low Income size firms. The maximum AG is 53
and the minimum AG is 15, which could clearly explain that mere existence for a
144
Chapter IV
longer period has not done any good things to improve their income level. The
size of borrowing also varies among the firms listed under low income size firms
though the P does not show relatively high standard deviation.
Table IV. 44
Descriptive Statistics of Determinants of LEV of Low Income Size Firms of Food
Industry in India
Variables
N
Minimum Maximum
Mean Std. Deviation
LEV_STD
54
.036
25.727
2.055
3.861
LEV_LTD
54
.089
48.860
3.492
7.105
LEV_TD
54
.186
57.282
5.547
9.699
VOL
54
.009
.759
.1044
.139
COLASS
54
.034
.836
.456
.193
NDTXSH
54
-4.890
16.005
.422
2.560
P
54
-.349
1.008
.200
.248
SIZ
54
-.905
2.457
1.367
.812
AG
54
15
53
22.52
9.668
GROW
54
-.174
.463
.036
.120
The correlation coefficient (see table IV. 45) of the low income size firms
show that AG (0.53) with LEV_STD, and SIZ have significant positive
correlation (0.33) with LEV_STD. With regard to LEV_LTD, GROW (0.50)
and AG (0.44) have highly significant positive correlation with LEV_LTD while
SIZ has significant positive correlation (0.30) with LEV_LTD. GROW (0.43),
AG (0.54), and SIZ (0.35) have highly significant positive correlation with
LEV_TD. In low income size firms, GROW, AG, and SIZ play a significant role
in determining the size of LEV as that of in small size firms.
The regression result (see table IV. 46) of the low income size firms show
that AG has highly significant positive coefficient with LEV_STD (0.20),
LEV_LTD (0.30) and LEV_TD (0.50). GROW has highly significant positive
coefficient with LEV_LTD (29.55) and LEV_TD (28.83) while SIZ has
significant positive coefficient with LEV_STD. The Adj-R2 value is 0.42 for
145
Chapter IV
LEV_TD, indicating that the model is 40% fit in case of LEV_TD. The Adj-R2
value is comparatively lesser in case of LEV_STD and LEV_LTD. The F-stat is,
however, highly significant in case of LEV_STD (4.02), LEV_LTD (5.66), and
LEV_TD (6.37), indicating that variance of the dependent variable is
significantly related to the variance of the predictor variables.
Table IV. 45
Correlation Matrix of Determinants of LEV of Low Income Size Firms of Food
Industry in India
Variables
LEV LEV LEV

NDTXS
_STD _LTD _TD VOL COLASS H
LEV_STD
1
LEV_LTD .523
1
(.00)
LEV_TD .781 .941
(.00) (.00)
VOL
1
1
GROW
AG GROW
NDTXSH
AG
SIZ
COLASS
SIZ
.328
(.015)
.529
(.00)
.301
(.02)
.444
(.00)
.499
(.00)
.351
(.00)
.535
(.00)
.434 -.327
(.00) (.016)
-.404
(.00)
-.510
(.00)
1
.303
(.02)
1
1
-.273
(.04)
.323
(.017)
.437
(.00)

146
Chapter IV
Table IV. 46
Results of Regression on Determinants of LEV of Low Income Size Firms of
Food Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat

LEV in terms of
LEV in terms of
LEV in terms of
short term debt
long term debt
total debt
-5.762
-9.365
-15.132
(-.71)
(0.02)
(0.00)
-1.711
6.001
4.299
(0.63)
(0.33)
(0.59)
2.582
5.838
8.446
(0.38)
(0.25)
(0.21)
0.018
0.077
0.095
(0.92)
(0.80)
(0.82)
1.849
-2.164
-0.302
(0.37)
(0.54)
(0.94)
1.501*
1.579
3.080
(0.03)
(0.19)
(0.05)
0.196**
0.300**
0.496**
(0.00)
(0.00)
(0.00)
-0.711
29.552**
28.832**
(0.87)
(0.00)
(0.00)
0.380
0.463
0.492
0.285
0.381
0.415
4.021**
5.660**
6.374**
(0.00)
(0.00)
(0.00)

level
The Kaiser-Meyer-Olkin measure (see table IV. 47) is not quite

satisfactory as it is below 0.60 (0.54). However, the Barletts test 2 value (694.20)
is highly significant, indicating that the correlation matrix is not an identity
matrix and encouraging factor analysis. The factor analysis of the low income
size firms shows (see table IV. 48) that the variable converges into three factors.
Factor 1 constitutes LEV_TD, LEV_LTD, LEV_STD and AG. Factor 2
147
Chapter IV
comprises of COLASS, SIZ, P and GROW, and factor 3 constitutes NDTXSH

and VOL. The predictor variable, AG alone converges with the dependent
variable, indicating a high level of inter correlation between them.
Table IV. 47
KMO and Bartlett's Test of Determinants of LEV of Low Income Size Firms of
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.543
694.203
45
.000
Table IV. 48
Factor Analysis of Determinants of LEV of Low Income Size Firms of Food
Industry in India
Factor
Eigen value
Factor 1
3.471
Factor 2
1.877
Factor 3
1.172
LEV_TD
LEV_LTD
LEV_STD
AG
COLASS
SIZ
P
GROW
NDTXSH
VOL
Factor loadings
0.954
0.867
0.800
0.719
-0.776
0.747
0.725
0.595
0.792
-0.715
IV.17.2 Analysis of Medium Income Size Firms

The trend line of medium income size firms shows (see chart IV.M) that
there is a steep rise after the year 2005-06 in the size of borrowings and a steady
rise after the year 2007-08, the period during which the low income size firms as
well as small size firms showed a sudden fall in the size of external borrowings.
The P of medium income size firms also follows a steady line without much
fluctuation.
148
Chapter IV
Chart IV.M
Trend Line Showing Relation between P and LEV_TD of Medium Income Size
Firms
30
26.513
25
20
28.142
17.881
13.653
15
14.725
LEV_TD
P
10.33
7.493
10
13.728
8.322
5
7.133
0.2681
0.352
0
0.321
0.316
0.413
0.32
0.321
0.434
0.355
0.405
The descriptive statistics of medium income size firms (see table IV. 49)
show that LEV_STD, LEV_LTD, and LEV_TD have comparatively higher
standard deviation, indicating that the firms grouped as medium income size
firms have different sizes of borrowings, and the AG also has higher standard
deviation, indicating a wider range of firms with varied AG falling under the
same category. The P and GROW, however, have comparatively lesser
deviations.
The correlation matrix of medium income size firms (see table IV, 50)
shows that P has significant positive correlation with LEV_LTD (0.44), and
LEV_TD (0.44), while it showed an insignificant positive correlation with LEV.
GROW also has significant positive correlation with LEV_TD in case of medium
income size firms, while AG has an insignificant negative correlation with
LEV_STD, LEV_LTD, and LEV_TD.
149
Chapter IV
Table IV. 49
Descriptive Statistics of Determinants of LEV of Medium Income Size Firms of
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
22
22
22
22
22
22
22
22
22
22
Minimum Maximum
1.111
16.199
.965
30.349
4.242
40.566
.010
.120
.099
.711
.007
.340
.079
.919
1.945
2.947
13
48
.018
.422
Mean
Std. Deviation
5.005
3.967
9.861
7.541
14.792
9.485
.047
.031
.424
.175
.058
.092
.350
.199
2.408
.259
24.77
7.904
.148
.104
The regression result of the medium income size firms (see table IV. 51)
shows that GROW has significant positive coefficient (15.41) with LEV_STD in
model 2 after removing the predictor variables NDTXSH, P, SIZ and AG. The
Adj- R2 value of model 2 is increased from 0.07 in model 1 for LEV_STD to 0.26.
The F-stat value is significant at 5% level (3.45) in model 2, proving the
predictability of variance of dependent variables by the predictor variable.
The predictor variable, VOL has significant negative coefficient in models
1 (-105.77) and 2 (-98.70) with LEV_LTD. P also has highly significant positive
coefficient with LEV_LTD in models 1 (31.96) and 2 (35.96) after removing
predictors SIZ, AG, and GROW, which proves that medium income size firms
do not have sufficient retained earnings and depend on external borrowing,
hence their LEV increases with P as they borrow more to utilize the growth
opportunities. COLASS has highly significant positive coefficient with
LEV_LTD (27.75) in model 2 as the predictor variable VOL has significant
negative coefficient in models 1 (-105.77) and 2 (-98.70) with LEV_LTD. P also
has highly significant positive coefficient with LEV_LTD in models 1 (31.96)
and 2 (35.96) after removing SIZ, AG and GROW, which reveals that medium
income size firms do not have sufficient retained earnings and depend on
external borrowing, hence their LEV increases with P as they borrow more to
150
Chapter IV
utilize the growth opportunities. COLASS has highly significant positive

coefficient with LEV_LTD (27.75) in model 2 as their external borrowings have
to be supported by higher level of COLASS. NDTXSH also has significant
positive coefficient with LEV_LTD (26.68) in case of medium income size firms.
P has significant positive coefficient with LEV_TD in model 2 (21.25) after
removing the predictor variables COLASS, NDTXSH and AG. GROW also has
significant positive coefficient in model 2 with LEV_LTD (from 0.54 to 0.60)
and with LEV_TD (from 0.41 to 0.47), thus the model fit is about 50% with
both LEV_LTD and LEV_TD. The F-stat value is highly significant in model 2
with LEV_LTD (8.80) and LEV_TD (5.68), thereby it leads to infer that GROW
and P have been the major predictors of LEV_LTD and LEV_TD of medium
income size firms.
Table IV. 50
Correlation Matrix of Determinants of LEV of Medium Income Size Firms of
Variables
LEV LEV LEV

LEV_STD 1
LEV_LTD
GROW
1
1
NDTXSH
1
.438 .443
(.04) (.03)
AG
GROW
AG
COLASS
SIZ
SIZ
LEV_TD .651 .915

(.00) (.00)
VOL
-.429
(.04)
-.662
(.00)
.445
(.03)
1
1
1
.480
(.02)

151
Chapter IV
Table IV. 51
Results of Regression on Determinants of LEV of Medium Income Size Firms of
Variables
(Constant)
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
R2
Adj-R2
F Stat

LEV in terms of short LEV in terms of long LEV in terms of total debt
term debt
term debt
Model 1 Model 2
Model 1
Model 2 Model 1
Model 2
15.341
7.913
4.147
-11.403
22.509
32.454
(0.38)
(0.00)
(0.85)
(0.05)
(0.49)
(0.07)
-34.521 -30.959
-105.765* -98.695* -139.565* -150.949*
(0.27)
(0.21)
(0.02)
(0.013)
(0.02)
(0.012)
-12.788
-8.769
22.168
27.748**
7.289
(0.18)
(0.05)
(0.09)
(0.00)
(0.68)
-2.250
22.212
26.677*
20.337
(0.84)
(0.15)
(0.03)
(0.34)
-3.534
31.957**
35.962**
27.331
21.249*
(0.62)
(0.00)
(0.00)
(0.06)
(0.013)
-2.099
-4.636
-7.524
-10.115
(0.68)
(0.50)
(0.44)
(0.15)
0.011
-.062
-.051
(0.92)
(0.69)
(0.82)
19.406
15.409*
10.252
29.844
43.259*
(0.10)
(0.04)
(0.50)
(0.17)
(0.011)
0.380
0.365
0.690
0.674
0.610
0.572
0.070
0.259
0.535
0.598
0.414
0.471
1.227
3.452*
4.449**
8.799**
3.122*
5.677**
(0.35)
(0.03)
(0.00)
(0.00)
(0.03)
(0.00)

level
152
Chapter IV
Table IV. 52
KMO and Bartlett's Test of Determinants of LEV of Medium Income Size Firms
of Food Industry in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.362
188.216
45
.000
The KMO (see table IV. 52) measure (0.36) is not satisfactory to conduct
a factor analysis, however, the Bartletts test is highly significant (188.22),
encouraging to conduct factor analysis. Factors of medium income size firms (see
table IV. 53) comprises of LEV_TD, LEV_LTD, GROW, NDTXSH and
LEV_STD of factor 1, while factor 2 constitutes SIZ, VOL and AG. Factor 3
constitutes COLASS and P.
Table IV. 53
Factor Analysis of Determinants of LEV of Medium Income Size Firms of Food
Industry in India
Factor
Eigen value
Factor 1
3.327
Factor 2
1.865
Factor 3
1.664
Variable
convergence
LEV_TD
LEV_LTD
GROW
NDTXSH
LEV_STD
SIZ
VOL
AG
COLASS
P
Factor
loadings
0.920
0.918
0.630
0.563
0.465
0.887
-0.617
-0.601
-0.858
0.842
153
Chapter IV
IV.17.3 Analysis of High Income Size Firms

The trend line of high income size firms shows (see chart IV.N) that they
have a steady rise in external borrowings, which is needed to meet the growth
opportunities. The level of P follows a steady line without much of fluctuations,
which fact shows their well established position.
Chart IV.N
Trend Line Showing Relation between P and LEV_TD of High Income Size
Firms
45
40
37.958
35.768
35
30
25
16.308
20
15
10
14.787
5
0
26.207
24.714
22.168
21.126
0.573
0.658
16.961
0.446
0.406
LEV_TD
17.401
P
0.479
0.492
0.758
0.751
1.035
0.888
The descriptive statistics (see table IV. 54) of high income size firms show
comparatively a lesser standard deviation in case of LEV when compared to that
of the firms under other categories, which shows that firms grouped as higher
income size firms have more or less same size of external borrowings. The P and
GROW show a lesser standard deviation. The AG, however, shows a higher level
of standard deviation, indicating that the firms under the category of higher
income size firms are also varied with AG.
The correlation results of high income size firms (see table IV. 55) show
that SIZ has significant positive correlation (0.70) with LEV_STD. AG has
insignificant negative relation with LEV, while P has significant negative relation
with LEV_LTD (-0.60) at 10% level, which reveals that the negative relation
between P and LEV increases with SIZ (though the results are not significant at
1% and 5% levels).
154
Chapter IV
Table IV. 54
Descriptive Statistics of Determinants of LEV of High Income Size Firms of Food
Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
10
10
10
10
10
10
10
10
10
10
Minimum Maximum
1.475
41.859
.354
27.648
6.009
69.506
.013
.207
.165
.615
.011293
.051
.211
1.389
2.365
3.677
16
51
.070
.381
Mean
11.426
11.914
23.340
.063
.347
.030
.649
2.964
31.30
.167
Std. Deviation
1.176
1.029
2.020
.058
.146
.014
.357
.365
13.284
.094
The regression result shows (see table IV. 56) that NDTXSH (-419.09)
and P (-22.59) have significant negative coefficient with LEV_STD in model 2
after removing COLASS and AG. SIZ has highly significant coefficient with
LEV_STD (25.86) in models 2 & 3 (28.13) after removing VOL in addition to
the variables removed under model 2 of LEV_STD. P also has highly significant
negative coefficient with LEV_STD (-20.15) under model 3 of LEV_STD with
Adj-R2 value 0.75, in model 1 of LEV_STD, 0.84 in model 2 and 0.85 in model 3.
Hence, the predictor variables could predict the dependent variable, LEV_STD
above 50%, thereby it leads to conclude that P, SIZ and NDTXSH are the major
predictors of LEV_STD in case of high income size firms.
P (-30.80) and GROW (-74.58) have highly significant negative coefficient with LEV_LTD in model 2 after removing the predictor variables SIZ
and AG, which fact shows that P and growth in total asset have negative effect
on LEV when their income grows. NDTXSH (-590.83) and VOL (163.73) have
significant negative coefficient with LEV_LTD in case of higher income size
firms, which is supported by F-stat value (25.43). P also has highly significant
negative coefficient with LEV_TD (-54.96) in model 2, after removing COLASS
and AG, which emphasizes the impact of income size on the relation between P
and LEV_TD. On the other hand, SIZ has highly significant positive coefficient
155
Chapter IV
(26.88) in model 2 of LEV_TD. GROW (-114.88), NDTXSH (-911.17) and VOL

(-170.75) on the other hand has negative coefficient with LEV_TD (GROW and
NDTXSH significant at 1% level and VOL significant at 5% level). Adj R2 value
is 0.95, which leads to infer that the model fit is over 90% in model 2 indicating
the key predictors of LEV_TD in case of high income size firms.
Table IV. 55
Correlation Matrix of Determinants of LEV of High Income Size Firms of Food
Industry in India
Variables
LEV LEV LEV

LEV_STD
1
LEV_LTD
LEV_TD
.677*
1
(.03)
.927** .904**
(.00) (.00)
VOL
SIZ
AG
GROW
1
1
.789**
(.00)
COLASS
NDTXSH
1
.733*
(.016)
P
SIZ
1
1
.701*
(.02)
AG
GROW

156
Chapter IV
Table IV. 56
Results of Regression on Determinants of LEV of High Income Size Firms of
LEV in terms of short term debt LEV in terms of
LEV in terms of total
Variables
long term debt
debt
Model 1 Model 2 Model 3 Model 1 Model 2 Model 1 Model 2
(Constant) -28.657 -29.378 -41.526 61.335 65.966
32.678
36.329
(0.46)
(0.22)
(0.02) (0.09)
(0.00)
(0.36)
(0.15)
VOL
-63.497 -34.869
-160.963 -163.726* -224.460 -170.745*
(0.54)
(0.44)
(0.10)
(0.01)
(0.10)
(0.01)
COLASS
14.186
19.542 18.035
33.728
(0.83)
(0.65)
(0.52)
(0.58)
NDTXSH -521.224 -419.090* -416.39* -604.593 -590.826* -1125.817 -911.166**
(0.29)
(0.04)
(0.02) (0.12)
(0.02)
(0.07)
(0.00)
P
-24.750 -22.592* -20.15** -30.997 -30.803** -55.747* -54.959**
(0.16)
(0.01)
(0.00) (0.05)
(0.00)
(0.03)
(0.00)
SIZ
24.350 25.866** 28.128** 1.254
25.603
26.876**
(0.08)
(0.00)
(0.00) (0.81)
(0.06)
(0.00)
AG
0.142
0.017
0.159
(0.62)
(0.92)
(0.53)
GROW
-35.622 -39.470 -30.058 -73.286 -74.576** -108.908 -114.875**
(0.37)
(0.18)
(0.21) (0.06)
(0.00)
(0.05)
(0.01)
2
R
0.945
0.931
0.918
0.971
0.969
0.986
0.976
Adj-R2
0.751
0.844
0.853
0.872
0.931
0.935
0.946
F Stat
4.876
10.734* 14.080** 9.732 25.425** 19.490*
32.592**
(0.18)
(0.02)
(0.00) (0.09)
(0.00)
(0.05)
(0.00)

level
However, factor analysis could not be conducted as the KMO result

shows that the correlation coefficient is not positive definite.
157
Chapter IV
IV.18 Sector-wise Analysis of Determinants of LEV

Since there are more number of sectors with less number of firms, the
firms are grouped by combining into three sectors constituting related firms.
Sector I constitutes 32 vegetable oil firms; Sector II constitutes 30 firms which
include 9 firms of tea sector, 11 firms of dairy sector, and 10 firms of sugar
sector; Sector III constitutes 24 firms comprising of miscellaneous sectors which
include coffee, cocoa products & confectionery, bakery products, processed

/packaged foods, starches, marine food, poultry & meat product, floriculture,
milling products, and other agricultural products.
IV.18.1 Analysis of Sector I
The trend line of relation between P and LEV_TD of sector I shows (see
chart IV.O) that the level of LEV_TD is quite steady without any sudden plunge
though there is an abrupt fall in P during the year 2008-09, Therefore, the firms
in sector I are able to meet circumstantial changes.
Chart IV.O
Trend Line Showing Relation between P and LEV_TD of Firms of Sector I
25
20
17.17
15
10
5
0
11.265
8.002
6.409
5.807
0.165
11.23
18.935
12.47
LEV_TD
11.183
7.412
0.218
0.239
0.194
0.265
0.29
0.351
0.241
0.602
0.274
The descriptive statistics (see table IV. 57) of the firms in sector I show
that LEV_STD and LEV_LTD have higher standard deviation but the standard
deviation of LEV_TD is comparatively very less, hence though the firms in
sector I have varied level of STD and LTD, their TD remains more or less closer
158
Chapter IV
to its mean values. The AG shows a higher standard deviation, indicating that a
wide range of firms with different AG comes under sector I. The NDTXSH also
has higher standard deviation, indicating the varied depreciation policy used by
the firms.
Table IV. 57
Descriptive Statistics of Determinants of LEV of Firms of Sector I of Food
Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
32
32
32
32
32
32
32
32
32
32
Minimum Maximum
.086
41.859
.093
27.648
.326
69.506
.013
.570
.034
.739
-4.89
16.005
-.349
.923
-.845
3.677
13
53
-.061
.422
Mean
5.040
5.948
10.988
.0744
.343
.701
.284
2.006
22.28
.099
Std. Deviation
7.819
7.069
1.374
.105
.137
3.319
.258
.847
8.509
.129
The correlation matrix (see table IV. 58) of the firms in sector I shows
that GROW has highly significant positive correlation with LEV_STD (0.48),
LEV_LTD (0.65) and LEV_TD (0.61). SIZ also has highly significant positive
correlation with LEV_STD (0.57), LEV_LTD (0.55) and LEV_TD (0.61), while
the other variables have insignificant correlation with LEV, P has insignificant
positive correlation with LEV.
The multiple regression result of sector I (see table IV. 59) shows that SIZ
has significant positive co-efficient with LEV_STD in model 2 (3.75) after
removing VOL, NDTXSH and P. The Adj-R2 value in model 2 of LEV_STD is
0.27, which shows that the model poorly fits for LEV_STD. GROW shows
highly significant positive coefficient with LEV_LTD in models 1 (33.22) & 2
(27.20) after removing variables VOL, NDTXSH, P and AG. SIZ has
significantly positive coefficient (2.98) with LEV_LTD in model 2. The model fit
159
Chapter IV
is about 50% (the Adj R2 value 0.49) showing that the predictor variables in the
model 2 are 50% determinants of LEV_LTD of sector I. SIZ has significant
positive coefficient in models 1 (6.80) & 2 (5.89) of LEV_TD. GROW has also a
significant positive coefficient in models 1 (48.27) & 2 (44.49) of LEV_TD. The
model fits only 40% (Adj-R2 value is 0.45) in case of LEV_TD. The F-stat value
is however significant in all cases indicating that the variance of the explaining
variables is significantly related to the variance in the LEV.
Table IV. 58
Correlation Matrix of Determinants of LEV of Firms of Sector I of Food Industry
in India
Variables
LEV_STD
LEV_LTD
LEV_TD
LEV LEV LEV

_STD _LTD _TD VOL COLASS NDTXSH P
1
.703**
(.00)
.931**
(.00)
AG GROW
1
.914**
(.00)
VOL
COLASS
NDTXSH
P
SIZ
SIZ
1
.570**
(.00)
.547** .606**
(.00) (.00)
AG
GROW
1
.480**
(.00)
.651** .608** -.396*

(.00) (.00) (.02)
.566**
(.00)

160
Chapter IV
Table IV. 59
Results of Regression on Determinants of LEV of Firms of Sector I of Food
Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat

LEV in terms of short LEV in terms of long LEV in terms of total
term debt
term debt
debt
Model 1 Model 2 Model 1 Model 2 Model 1 Model 2
-3.177
-3.744
-10.741
-7.575
-13.918
-9.356
(0.65)
(0.52)
(0.04)
(0.06)
(0.21)
(0.17)
-1.245
10.280
9.035
(0.93)
(0.38)
(0.71)
-4.093
-3.727
13.278
14.153
9.185
(0.08)
(0.05)
(0.56)
(0.68)
(0.69)
-0.042
0.136
0.093
(0.92)
(0.67)
(0.89)
-.827
-3.221
-4.048
(0.89)
(0.46)
(0.66)
3.712
3.749*
3.088
2.977*
6.801*
5.887*
(0.08)
(0.04)
(0.05)
(0.03)
(0.04)
(0.03)
.047
0.048
0.121
0.168
0.185
(0.76)
(0.74)
(0.29)
(0.49)
(0.41)
15.051
14.930
33.217** 27.198** 48.268*
44.490*
(0.27)
(0.20)
(0.00)
(0.00)
(0.03)
(0.019)
0.369
0.367
0.576
0.538
0.497
0.484
0.184
0.274
0.453
0.489
0.350
0.428
2.001
3.918*
4.663**
10.890** 3.382*
8.738**
(0.09)
(0.012)
(0.00)
(0.00)
(0.012)
(0.00)

level
The KMO result shows that the correlation was not positive definite, and
the data are not appropriate for a factor analysis.
IV.18.2 Analysis of Sector II
The trend line of relation between P and LEV_TD of firms of sector II
shows (see chart IV.P) that the level of borrowing took a deep plunge in the year
161
Chapter IV
2008-09 as in the case of small size and low income size firms, hence, sector I
constitutes firms which are comparatively smaller in size, and their external
borrowing is affected by environmental changes.
Chart IV.P
Trend Line Showing Relation between P and LEV_TD of Firms of Sector II
30
24.693
25
21.475
20
15
8.321
10
5
0
15.98
10.64
7.408
0.23
0.281
8.359
9.472
0.219
0.195
10.74
0.269
0.257
LEV_TD
11.785
0.409
0.394
0.431
0.542
The descriptive statistics (see table IV. 60) of firms in sector II show that
the standard deviation is high in case of LEV_STD but in case of LEV_LTD and
LEV_TD it is comparatively lesser. Therefore, the firms in sector II have wider
variation in their short term borrowings while the size of outside debt, however,
remains same among the firms in sector II. The other variables have
comparatively lesser deviation. AG, however, as that of the other categories,
shows a higher standard deviation.
The correlation matrix of firms in sector II shows (see table IV. 61) that
AG has highly significant positive correlation (0.56) with LEV_STD, while P
(0.39) and SIZ (0.42) have significant positive correlation with LEV_STD.
GROW has significant positive correlation with LEV_LTD (0.51) at 1% level,
and LEV_TD (0.42) at 5% level.
162
Chapter IV
Table IV. 60
Descriptive Statistics of Determinants of LEV of Firms of Sector II of Food
Industry in India
Variables
Minimum Maximum
Mean
Std. Deviation
LEV_STD
30
.081
25.727
5.008
5.693
LEV_LTD
30
.149
48.860
7.937
1.084
LEV_TD
30
.23
57.282
12.887
1.470
VOL
30
.009
.289
.063
.056
COLASS
30
.165
.836
.499
.177
NDTXSH
30
.007
.098
.031
.019
30
-.017
1.389
.323
.328
SIZ
30
-.905
3.385
1.976
.925
AG
30
15
52
29.03
11.340
GROW
30
-.066
.463
.093
.122
The multiple regression result of firms of sector II shows (see table IV. 62)
that AG has significant coefficient with LEV_STD (0.25*) in models 1 & 2
(0.24**). SIZ has significant coefficient (2.099) with LEV_STD. GROW has
significant coefficient with LEV_LTD (model 1 (57.54**) & 2 (57.55**)) as well
as in LEV_TD (model 1 (58.15*) & 2 (57.74*)), hence, GROW has been a
significant determinant of size of external borrowings of firms of sector II.
However, the Adj-R2 value is insignificant in all the models, revealing that the
regression model fits poorly for firms in sector II.
Kaiser-Meyer-Olkin measure (see table IV. 63) is not adequate (0.44) to
support a factor analysis. However, Bartletts Test of sphericity is significant at
1% level, indicating that the correlation matrix is not an identity matrix and
factor analysis could well be conducted.
163
Chapter IV
Table IV. 61
Correlation Matrix of Determinants of LEV of Firms of Sector II of Food
Industry in India
Variables
LEV LEV LEV

LEV_STD
1
LEV_LTD .540**
1
(.00)
LEV_TD .785** .945**
(.00) (.00)
VOL
AG
GROW
AG GROW
1
1
.418*
(.02)
NDTXSH
SIZ
SIZ
COLASS
.388*
(.03)
.415*
(.02)
.556**
(.00)
1
-.675**
(.00)
-.554**
(.00)
.510** .418*
(.00) (.02)
1
.541**
(.00)
.458*
(.011)
1
1
.394*
(.03)
**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).
164
Chapter IV
Table IV. 62
Results of Regression of Determinants of LEV of Firms of Sector II of Food
Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat

LEV in terms of short LEV in terms of long LEV in terms of total
term debt
term debt
debt
-8.415
-5.546
-7.195
-4.839
-15.408 -15.505
(0.18)
(0.09)
(0.56)
(0.62)
(0.36)
(0.31)
7.477
6.617
16.737
(0.70)
(0.86)
(0.75)
3.894
14.229
18.395
18.003
21.920
(0.66)
(0.42)
(0. .20)
(0.46)
(0.27)
-43.570
(0.53)
0.158
(0.97)
2.517
(0.08)
0.249*
(0.02)
0.848
(0.92)
0.424
0.241
2.318
(0.06)
-19.439
(0.69)
2.099*
(0.04)
0.241**
(0.00)
0.415
0.347
6.147**
(0.00)
-197.064
(0.16)
-4.630
(0.61)
2.510
(0.36)
0.166
(0.41)
57.538**
(0.00)
0.375
0.176
1.883
(0.12)
-220.602
(0.07)
2.526
(0.32)
57.551**
(0.00)
0.355
0.251
3.436*
(0.02)
-254.113
(0.18)
-4.556
(0.71)
5.054
(0.18)
0.417
(0.14)
58.154*
(0.02)
0.370
0.169
1.844
(0.12)
-246.062
(0.15)
4.723
(0.19)
0.354
(0.12)
57.742*
(0.02)
0.364
0.232
2.751*
(0.04)

level
The combination of variables as factors for sector II shows (see table IV.
64) that factor 1 constitutes LEV_TD, LEV_LTD, and LEV_STD. Factor 2
constitutes P, COLASS, and SIZ. Factor 3 constitutes NDTXSH, VOL, AG and
GROW, indicating interrelation between the variables grouped in to factors.
165
Chapter IV
Table IV. 63
KMO and Bartlett's Test of Determinants of LEV of Firms of Sector II of Food
Industry in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.439
317.011
45
.000
Table IV. 64
Factor Analysis of Determinants of LEV of Firms of Sector II of Food Industry in
India
Factor
Eigen value
Factor 1
3.696
Factor 2
1.823
Factor 3
1.623
Variable
convergence
LEV_TD
LEV_LTD
LEV_STD
P
COLASS
SIZ
NDTXSH
VOL
AG
GROW
Factor
loadings
.976
.947
.724
.889
-.853
.750
.813
.700
-.541
.502
IV.18.3 Analysis of Sector III

The trend line revealing the relation between P and LEV_TD of sector III
shows (see chart IV.Q) that there is no steep rise in the size of external
borrowings in case of firms in sector III as that of in case of sector II. However,
the level of borrowings plunged down in the year 2008-09. The level of P has
risen during the same period unlike in other sectors, hence the business
environment in this sector has helped the firms to maintain its size of P during
the period of crisis.
166
Chapter IV
Chart IV.Q
Trend Line Showing Relation between P and LEV_TD of Firms of Sector III
8
7
6
5
4
3
2
1
0
4.193
3.822
3.888
3.961
5.05
7.226
6.319
5.174
4.078
LEV_TD
P
0.285
0.248
6.342
0.196
0.163
0.267
0.237
0.27
0.186
0.271
0.373
The descriptive statistics (see table IV. 65) of firms in sector III indicate a
higher degree of standard deviation in case of LEV_LTD and LEV_TD,
indicating that the external long term borrowings of the firms under sector III
vary widely as per their requirements, whereas the standard deviation of
LEV_STD is comparatively lower, indicating that the firms have more or less the
same size of short term borrowings. The deviation in P is comparatively low for
all the firms.
Table IV. 65
Descriptive Statistics of Determinants of LEV of Firms of Sector III of Food
Industry in India
Variables
LEV_STD
LEV_LTD
LEV_TD
VOL
COLASS
NDTXSH
P
SIZ
AG
GROW
N
24
24
24
24
24
24
24
24
24
24
Minimum Maximum
.036
3.904
.089
18.249
.186
20.047
.009
.759
.099
.831
.014
.125
-.278
1.008
-.413
2.804
15
48
-.174
.316
Mean
.991
4.008
5.005
.127
.477
.043
.259
1.373
20.42
.037
Std. Deviation
1.070
5.428
6.261
.166
.206
.029
.281
.823
7.751
.122
167
Chapter IV
The correlation matrix of sector III shows (see table IV. 66) that SIZ has
highly significant correlation with LEV_STD (0.54), with LEV_LTD (0.71) as
well as with LEV_TD (0.71). The GROW has a significant correlation with
LEV_LTD (0.46) as well as with LEV_TD (0.44). While P has significant
positive correlation with LEV_LTD (0.41), NDTXSH has significant negative
correlation (-0.42) with LEV_STD. P, having significant positive correlation
(0.41) with LEV_LTD, matches with medium income size firms correlation
result, therefore the firms in sector III earns medium income which is not
adequate to utilize the growth opportunities and therefore they borrow from
external sources as they grow (as their P increases).
Table IV. 66
Correlation Matrix of Determinants of LEV of Firms of Sector III Food Industry in India
Variables
LEV LEV LEV
_STD _LTD _TD VOL COLASS NDTXSH P
SIZ AG GROW
LEV_STD
1
LEV_LTD
LEV_TD
.742
1
(.00)
.815 .993
(.00) (.00)
VOL
COLASS
NDTXSH
-.424
(.03)
.405
-.518
(.05)
(.01)
.544 .712 .710
(.00) (.00) (.00)
SIZ
-.415
(.04)
.532
(.00)
-.644
(.00)
-.498
(.013)
1
1
-.598
(.00)
.655
(.00)
AG
GROW
.459 .441 -.486

(.02) (.03) (.016)
-.437
(.03)
.446
(.02)
.676
(.00)

168
Chapter IV
The regression result of firms in sector III shows (see table IV. 67) that
though P is correlated with LEV, it is not a significant determinant of LEV. P has
no significant coefficient with LEV, and it is not a significant determinant of
LEV. The regression run shows that P has insignificant negative coefficient with
LEV. SIZ has significant coefficient (0.77) with LEV_STD in model 2 after
removing the effects of COLASS, NDTXSH and P. It also has significant positive
coefficient (5.95) with LEV_LTD in model 1 and highly significant coefficient
(5.45) with LEV_LTD in model 2. SIZ has significant coefficient with LEV_TD
(6.74) in model 1 and highly significant coefficient with LEV_TD (6.50) in
model 2 after removing COLASS, NDTXSH and GROW.
Table IV. 67
Results of Regression on Determinants of LEV of Firms of Sector III of Food
Industry in India
Variables
(Constant)
VOL
COLASS
NDTXS
P
SIZ
AG
GROW
R2
Adj-R2
F Stat

LEV in terms of LEV in terms of long LEV in terms of total
short term debt
term debt
debt
0.192
0-.528
-3.650
-2.063
-3.481
-1.858
(0.85)
(0.42)
(0.47)
(0.36)
(0.55)
(0.47)
-1.749
-1.571
-4.654
-3.787
-6.399
-5.973
(0.26)
(0.23)
(0.52)
(0.56)
(0.45)
(0.42)
-0.838
2.531
1.784
(0.59)
(0.73)
(0.83)
-2.084
7.232
4.774
(0.83)
(0.88)
(0.93)
-0.953
-2.556
-3.068
-3.468
-4.054
(0.44)
(0.66)
(0.49)
(0.61)
(0.43)
0.792
0.771*
5.951* 5.454**
6.743*
6.499**
(0.09)
(0.02)
(0.014)
(0.00)
(0.01)
(0.00)
0.038
0.038
-0.029
0.008
(0.18)
(0.14)
(0.82)
(0.95)
-2.635
-2.921
-5.159
-3.814
-7.848
-6.767
(0.30)
(0.19)
(0.66)
(0.71)
(0.57)
(0.56)
0.473
0.436
0.531
0.523
0.533
0.530
0.242
0.317
0.326
0.422
0.329
0.431
2.050
3.666*
2.587
5.205**
2.610
5.357**
(0.11)
(0.02)
(0.05)
(0.00)
(0.05)
(0.00)

level
169
Chapter IV
The Kaiser-Meyer-Olkin measure (see table IV. 68) is 0.60, indicating that
the factor analysis will be able to converge the variables into reasonable factors.
Bartletts Test also has highly significant 2 value (308.44), encouraging to run of
factor analysis.
Table IV. 68
KMO and Bartlett's Test of Determinants of LEV of Firms of Sector III of Food
Industry in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.604
308.441
45
.000
The factor analysis result shows (see table IV. 69) that LEV_TD,
LEV_LTD and LEV_STD converges into factor1; P, COLASS, VOL, SIZ,
GROW, NDTXSH converges into factor 2 and AG constitutes factor 3 as it has
no significant interrelation with other variables.
Table IV. 69
Factor Analysis of Determinants of LEV of Firms of Sector III of Food Industry in India
Factor
Eigen value
Variable
Factor
convergence
loadings
LEV_TD
0.935
Factor 1
4.961
LEV_LTD
0.910
LEV_STD
0.859
P
.831
COLASS
-.768
VOL
-.679
Factor 2
1.423
SIZ
.649
GROW
.594
NDTXSH
-.555
Factor 3
1.027
AG
.803
170
Chapter IV
IV.19 Conclusion
The analysis conducted to study the determinants of CS and the endeavor to
draw attention on the impact of size and sectoral difference have proved to be
interesting and some significant conclusion is drawn about the food industry.
IV.19.1 Overall Analysis
The overall results of equation I show that GROW, AG, and SIZ have
significant positive correlation with LEV_STD, LEV_LTD and LEV_TD while, P has
significant positive correlation with LEV_STD, which fact coincides with that of Long
and Malitz (1985)71, Pandey (2004)72 who found a positive relation between P and
LEV. However, the results of Myers (1984)73, Titman and Wessels (1988)74, Kester
(1986)75, Friend and Hasbrouch (1988)76, Friend & Lang (1988)77, and Chen and
Zhao (2004)78 who found a negative impact between P and LEV has been untrue in
case of food industry in India. Thus, the hypothesis Ho8 is rejected. While, SIZ, AG, and
GROW have highly significant positive correlation with LEV_STD, LEV_LTD, &
LEV_TD, COLASS has significant negative correlation with LEV_STD which coincides
with the findings of Titman and Wessels (1988) 79. On the other hand, VOL has significant
negative correlation with LEV_TD. Hence the hypotheses Ho10, Ho11, and Ho12 are rejected
and Ho9 which states that, there is no significant relation between non debt tax shield and
leverage is accepted.
171
Chapter IV
Hypotheses
LEV_STD
Ho = There is no significant
relationship between profitability
+ve*
and leverage.
Rejected
8
Ho9 = There is no significant

relationship between non debt
tax shield and leverage.
relationship between collateral
assets and leverage.
Ho11= There is no significant
relationship between growth and
leverage.
relationship between volatility
and leverage.
Accepted
Table IV.70
Summary of Overall Results of the Determinants of LEV
LEV_LTD
LEV_TD
Accepted
+ve*
Rejected
Accepted
Accepted
-ve*
Rejected
Accepted
Accepted
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
Accepted
-ve*
Rejected
Accepted
Supporting works
Long and Malitz (1985) and Pandey (2004) predicted a positive
relation between CS and P. Myers (1984), Titman and Wessels
(1988), Barton and Gordon (1988), Johnson (1998), Booth Collins
et al. (2001), and Fama and French (2002) argued that there is a
negative relationship between P and LEV.
Fisher, Heinkel, and Zechner (1989) provided evidence that tax
benefits to debt are mostly negligible.
Hutchinson and Michaelas (1998) and Titman and Wessels (1988)

identified negative relation between collateralizable capital and debt
level.
Barton and Gordon (1988) work provided evidence that GROW
rate is positively correlated with debt.
Johnson (1997), and Titman and Wessels (1988) identified negative
relation between volatility and debt level.
172
Chapter IV
IV.19.2 Sales Size-wise Analysis

The sales size wise analysis shows that in small size firms GROW, AG
and SIZ have significant correlation with LEV_STD, LEV_LTD and LEV_TD
and hence the hypotheses Ho11, there is no significant relationship between
growth and leverage is rejected. P has insignificant positive correlation with
LEV, hence the hypothesis Ho8 there is no significant relation between P and
LEV is accepted in case of small size firms, thus the findings by Leland (1994) 80,
Kane, Marcus, and MacDonald (1984) 81 and Wiggins (1990) 82 in respect of LEV
is invariant to changes in P in case of small size firms.
The predictor variable P has no significant correlation with the dependent
variables in case of medium size firms; therefore the hypothesis Ho8 is accepted.
However, VOL has significant negative correlation with LEV_TD substantiating
the rejection of Ho12. SIZ, AG and GROW have significant coefficients with
LEV_LTD in regression model 3, and the model fit is about 40% in LEV_LTD.
The correlation coefficient of large size firms shows that there exists no
significant correlation between predictor variables and the dependent variables,
except for SIZ; hence the hypotheses Ho8, Ho9, Ho10, Ho11, and Ho12 are accepted.
SIZ has a significant coefficient with LEV_STD in case of large size firms. The
impact of size on the relation between P and LEV cannot be brought to light as
their relation is insignificant in all the categories viz., small size, medium size and
large size firms and therefore the hypothesis Ho13 there is no significant
influence of size of firms in deviating the relationship between profitability and
capital structure is accepted in case of sales size wise analysis.
173
Chapter IV
Hypotheses
8
Ho = There is no
between profitability
and leverage.
Ho9 = There is no
between non debt tax
shield and leverage.
Ho10 = There is no
between collateral assets
and leverage.
Ho11= There is no
between growth and
leverage.
Ho12 = There is no
between volatility and
leverage.
Table IV.71
Summary of Sales Size-wise Analysis of the Determinants of LEV
STD
Small Size Firms LEV
Medium Size Firms LEV
LTD
TD
STD
LTD
TD
STD
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
+ve*
Rejected
+ve**
Rejected
+ve**
Rejected
Accepted
Accepted
Accepted
Large Size Firms LEV
LTD
TD
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
+ve*
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
-ve*
Rejected
Accepted
Accepted
Accepted
174
Chapter IV

However, income size wise analysis put forth different results. SIZ, AG
and GROW have significant positive correlation with LEV_STD, LEV_LTD and
LEV_TD in case of low income size firms. There exists an insignificant positive
correlation between P and LEV as that of the small size firms; however the
medium income size firms show that there exists a significant positive correlation
between P & LEV_LTD, as well as between P & LEV_TD, which result
supports the overall result. Thus, hypothesis Ho8 is rejected. However, the
analysis of high income size firms shows that P has insignificant negative
correlation with LEV and significant negative coefficient with LEV_ LTD and
LEV_TD in the regression models; hence the hypothesis Ho13 that there is no
significant influence of size of firms in deviating the relationship between
profitability and capital structure is rejected. Thus, the negative relation between
P and LEV increases with SIZ as pointed out by Rajan and Zingales (1995) 83 and
Titman and Wessels (1988) 84. The regression model fits best in case of high
income size firms with the adj-R2 value of above 80%. The summary of results is
shown in table IV.72.
The sector wise analysis shows that in sector I, GROW and SIZ are the
major determinants of LEV_STD, LEV_LTD and LEV_TD; thus the hypothesis
Ho11 is rejected. In sector II, GROW and SIZ are the major determinants of
LEV_LTD and LEV_TD and hence the hypothesis Ho11 is rejected, while SIZ,
AG and P have significant positive correlation with LEV_STD leading to the
rejection of Ho8 in case of sector II firms. However, in sector III P has significant
positive correlation with LEV_LTD. GROW and SIZ are other predictor
variables having significant correlation with LEV. Thus, there are various
determinants in each sector that are considered as the major determinants in
each sector, indicating the significant impact of sectoral differences as indicated
by Barton, Hill, and Sundaram (1989) 85. Therefore, Ho14 that there is no
significant influence of sectoral differences of firms in deviating the relationship
between profitability and capital structure is rejected. The major findings are
summarised in table IV.73.
175
Chapter IV
Hypotheses
8
Ho = There is no
between profitability
and leverage.
Ho9 = There is no
Ho10 = There is no
and leverage.
Ho11= There is no
between growth and
leverage.
Ho12 = There is no
leverage.
Table IV.72
Summary of Income Size-wise Analysis of the Determinants of LEV
Low Income Size Firms LEV
Medium Income Size Firms LEV
High Income Size Firms LEV
STD
LTD
TD
STD
LTD
TD
STD
LTD
TD
Accepted
Accepted
Accepted
Accepted
+ve*
Rejected
+ve*
Rejected
-ve*
Rejected
-ve**
Rejected
-ve**
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
-ve*
Rejected
-ve*
Rejected
-ve*
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
+ve**
Rejected
+ve**
Rejected
Accepted
Accepted
+ve*
Rejected
-ve*
Rejected
-ve**
Rejected
-ve**
Rejected
Accepted
Accepted
Accepted
Accepted
-ve*
Rejected
-ve*
Rejected
Accepted
Accepted
Accepted
176
Chapter IV
Hypotheses
8
Ho = There is no
between profitability and
leverage.
Ho9 = There is no
Ho10 = There is no
and leverage.
Ho11= There is no
between growth and
leverage.
Ho12 = There is no
leverage.
Table IV.73
Summary of Sector-wise Analysis of the Determinants of LEV
STD
Sector I Firms LEV
LTD
TD
STD
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Sector II Firms LEV
LTD
TD
STD
+ve*
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
+ve**
Rejected
+ve**
Rejected
+ve**
Rejected
Accepted
Accepted
Accepted
Sector III Firms LEV
LTD
TD
Accepted
+ve*
Rejected
Accepted
Accepted
-ve*
Rejected
Accepted
-ve*
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
+ve**
Rejected
+ve*
Rejected
Accepted
+ve*
Rejected
+ve*
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
177
Chapter IV
IV.20 Regression on Determinants of P (Equation II)

Equation II is formulated for the purpose of finding out the factors
determining P. The term P has been defined as the average rate of return on assets
(ROA) by Lowe Naughton, and Taylor (1994)86.
P_TASSET = PBITD / Total Assets
Profit margin also has been used as another dependent variable to measure
profitability.
P_SAL = PBITD /Sales.
There are various variables determining P of the firm. The variables that are
analysed as predictors in this study are aggressive investing policy (AIP), capital
intensity (CAPINS), volatility (VOL), growth (GROW), and size (SIZ). AIP
increases the profit of the firms hence, it becomes important to study the relation
between AIP and P. CAPINS is associated with difference in P (Bettis 1981)87. P
declines with CAPINS (Ghemawat and Caves 1986)88 and hence it is also analysed
as a variable determining P. Volatility (VOL) in earning should be studied when
considering consistent profit earning capacity. The relation between GROW and P is
also analysed. SIZ of the firm also influences its P. Small enterprises are
characterized by variability in profits and growth hence, SIZ is argued to be another
predictor of P. The hypotheses are thus:
Ho15 = There is no significant relationship between aggressive investment policy
and profitability of the firms.

Ho16 = There is no significant relationship between capital intensity and profitability
of the firms.
Ho17 = There is no significant relationship between volatility and profitability of the
firms.
Ho18= There is no significant relationship between growth and profitability of the
firms.
175
Chapter IV
To study the impact of SIZ and sectoral differences the following hypotheses
are assumed in addition.
Ho19 = There is no significant influence of size in deviating the relationship between
the predictor variables and profitability of the firms.

Ho20= There is no significant influence of sectoral differences in deviating the
relationship between predictor variables and profitability of the firms.
The regression equation for analysis of determinants of P is as follows:
= + 1 AIP + 2 CAPINS+ 3 SIZ + 4 GROW + 5 VOL +
Variables
Table IV.74
Ratios of Independent Variables Determining P
Description
P_TASSET PBITD / Total Assets
Inference
It indicates the return on assets invested.
High value denotes large return on asset
and vice versa
It indicates the profit margin earned on
turnover of firm. A high value implies a
great profit margin and vice versa
It indicates the proportion of current assets
to total assets. A low value indicates more
aggressive use of assets for increasing
earnings and vice versa
It indicates how intensively the assets are
used to increase turnover. A low value
indicates large turnover for the investment
in assets and vice versa
Turnover adjusted for fluctuation over years
The growth of total asset over years
P_SAL
PBITD / Sales
AIP
Current Assets / Total Assets
CAPINS
Total Assets / Sales
SIZ
GROW
Logarithm of Sales over Years

Compounded annual growth rate
(CAGR) of total assets
Standard deviation of earnings before
A high value denotes greater volatility in
interest, taxes and depreciation (EBITD) / earnings from the assets invested and vice
Total Assets
versa
VOL
Source: Compiled from secondary sources
176
Chapter IV
IV.22 Overall Analysis of Determinants of P

The trend line between P_SAL as well as P_TASSET of firms in food
industry shows (see chart IV.R) that P in terms of ROA has been steady over the
period of study. However, the profit margin (P_SAL) had a steep descend for the
years 2004-05 and 2005-06. This was due to a big drop in agricultural production
during this period.
The descriptive statistics of the overall firms show (see table IV. 75) that the
standard deviation of CAPINS is high and dependent P_SAL also has a higher
standard deviation when compared to that of the other dependent variable,
P_TASSET, which indicates that the intensity with which the assets are employed
for production has a possible relation with the profit margin of the firms.
Chart IV.R
Overall Trend Line Showing Relation between P_SAL and P_TASSET
0.4
0.3
0.2
0.1
0
-0.1
-0.2
P_SAL
P_TASSET
-0.3
-0.4
-0.5
-0.6
The correlation result (see table IV. 76) shows that VOL has highly
significant negative correlation (-0.33) with P_TASSET while GROW (0.42) and
SIZ (0.50) have highly significant positive correlation with P_TASSET. The impact
of VOL on P is put to light through this correlation matrix. On the other hand,
CAPINS shows a highly significant negative correlation (-0.91) with P_SAL, and
SIZ has significant positive correlations (0.27) with P_SAL.
177
Chapter IV
Table IV. 75
Overall Descriptive Statistics of Determinants of P of Food Industry in India
Variables
N
Minimum Maximum
Mean
Std. Deviation
P_TASSET
86
-.28
.431
.084
.082
P_SAL
86
-7.644
2.239
.020
.877
AIP
86
.060
.894
.482
.194
CAPINS
86
.154
235.270
5.392
2.586
SIZ
86
-.905
3.677
1.819
.903
GROW
86
-.174
.463
.080
.126
VOL
86
.009
.759
.085
.115
Table IV. 76
Overall Correlation Matrix of Determinants of P of Food Industry in India
Variables
P_TASSET P_SAL
P_TASSET
1
P_SAL
AIP
VOL
GROW
VOL
CAPINS
GROW
SIZ
AIP
SIZ
CAPINS
.502
(.00)
.420
(.00)
-.327
(.00)
-.910
(.00)
.266
(.01)
1
.447
(.00)
.276
(.01)
-.430
(.00)
1
.558
(.00)
-.299
(.00)
1
-.348
(.00)

178
Chapter IV
The overall regression result shows (see table IV. 77) that AIP has highly
significant negative coefficient with P_TASSET in models 1 (-0.13) & 2 (-0.12) after
removing the effects of CAPINS and GROW. SIZ has highly a significant positive
coefficient with P_TASSET in model 1 (0.05) & 2 (0.05). CAPINS is one of the
major variables determining P_SAL, which has highly significant coefficient with
P_SAL in models 1(-0.03) & 2 (-0.03) after removing GROW and VOL. AIP has
significant negative coefficient (-0.43) with P_SAL in model 2. SIZ has a significant
negative coefficient (-0.11) with P_SAL in model 2 while it has a positive impact on
P_TASSET. The Adj-R2 value for P_TASSET is only about 33% (0.33 each in
model 1 and model 2 respectively), indicating that the predictor variables determine
the dependent variable P_TASSET to the extent of 33% only and there are other
predictors influencing P_TASSET. The Adj-R2 value for P_SAL is about 84% (0.85
in model 1 and 0.85 in model 2), indicating that the regression model fits above
84% for P_SAL. The F-stat is also highly significant in all the cases, indicating that
the variance in the explaining variables is assisted by variance in the dependent
variables.
The Kaiser-Meyer-Olkin measure (see table IV. 78) is 0.58, hence the factor
analysis conducted would give a statistically significant result. Bartletts test 2 value
(284.84) is highly significant, stating that the correlation matrix is not an identity
matrix and factor analysis shall be conducted with these variables.
The factor analysis (see table IV. 79) converges P_TASSET, GROW, VOL
and SIZ as factor 1, indicating the interrelation among them. P_SAL and CAPINS
are converged as factor 2 stressing the relation between P_SAL and CAPINS which
was also put forth by the overall correlation and regression results. AIP constitutes
factor 3, indicating that it has a lesser relation with the other variables.
179
Chapter IV
Table IV. 77
Overall Results of Regression on Determinants of P of Food Industry in India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat

Dependent variable P_TASSET
Dependent variable
P_SAL
Model 1
Model 2
Model 1
Model 2
0.064
0.062
0.534
0.593
(0.01)
(0.01)
(0.00)
(0.00)
-0.125**
-0.124**
-0.412
-0.426
(0.00)
(0.00)
(0.05)
(0.04)
0.00004536
-0.033**
-0.033**
(0.88)
(0.00)
(0.00)
0.045**
0.052**
-0.086
-0.105*
(0.00)
(0.00)
(0.14)
(0.04)
0.108
-.088
(0.13)
(0.81)
-0.129
-0.154*
.277
(0.06)
(0.02)
(0.43)
0.372
0.354
0.856
0.855
0.333
0.331
0.847
0.849
9.497**
14.997**
95.126**
160.633**
(0.00)
(0.00)
(0.00)
(0.00)
Note: Figures in parentheses are p values;**Significant at 0.01 level;*Significant at 0.05 level
Table IV. 78
KMO and Bartlett's Test of Determinants of P of Food Industry in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.575
284.837
21
.000
180
Chapter IV
Table IV. 79
Overall Factor Analysis of Determinants of P of Food Industry in India
Factor
Eigen value
Factor 1
2.721
Factor 2
1.724
Factor 3
1.016
Variable
convergence
P_TASSET
GROW
VOL
SIZ
P_SAL
CAPINS
AIP
Factor
loadings
0.825
0.723
-0.679
0.644
0.967
-0.957
0.944
IV.23 Sales Size-wise Analysis of Determinants of P

The sales size-wise analysis is attempted to bring out the effect of size of
firms on P of the firms. The firms are classified on the same basis as that of grouped
for equation I. The firms with sales < Rs.100 crore are grouped as small size firms;
the firms with sales > Rs.100 crore but < Rs.500 crore are grouped as medium size
firms; and firms with > Rs.500 crore are grouped as large size firms. The average
sales over a period of 10 years taken for the study is considered for this purpose.
The trend analysis of P_TASSET shows (see chart IV.S) that the P of small
size firms show a fall in the period 2005-06, which is similar to the overall result,
however, these firms could recover gradual rise in P thereafter. The contradictory is
the fact in case of medium size firm which dont show any deep plunge in the year
2005-06. However, there are constant fluctuations over the period with fall and rise
persistently. The medium size firms show that they are not able to make use of their
assets effectively during 2006-07, and there is a constant fall in its P_TASSET. The
trend line of large size firms with regard to P_TASSET, however, does not show
much of its steep fluctuations.
181
Chapter IV
Chart IV.S
Trend Line Showing Comparison between P_TASSET of Small Size Firms, Medium
Size Firms and Large Size Firms
0.2
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
P_TASSET FOR SMALL

SIZE FIRMS
P_TASSET FOR
MEDIUM SIZE FIRMS
P_TASSET FOR LARGE
SIZE FIRMS
The trend line of P_SAL of small size firms shows (see chart IV.T) that the
profit margin of the firms has higher degree of fluctuation during the period of
study, thus they have the tendency to use opportunities and increase the profit
margin and when the situation is not good they reduce their profit margin. This is
apparent through the trend line rising steeply during the period 2008-09 above the
lines of medium size firms as well as large size firms. On the other hand, the trend
lines of medium size firms and large size firms show that they have a stable profit
margin over the study period.
Chart IV.T
Trend Line Showing Comparison between P_SAL of Small Size Firms, Medium Size Firms
and Large Size Firms
0.8
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
-0.8
P_SAL FOR SMALL SIZE

FIRMS
P_SAL FOR MEDIUM
SIZE FIRMS
P_SAL FOR LARGE SIZE
FIRMS
-1
-1.2
-1.4
182
Chapter IV
IV.23.1 Analysis of Small Size Firms

Descriptive statistics of small size firms show (see table IV. 80) high standard
deviation in case of CAPINS, showing validity in intensively employing their capital.
The mean of P_SAL is negative, indicating a negative profit margin in case of small
size firms. The deviation is, however, higher in case of P_SAL, indicating the varied
level of profit margin earned by small size firms.
Table IV. 80
Descriptive Statistics of Determinants of P of Small Size Firms of Food Industry in
India
Variables
PTASSET
PSAL
AIP
CAPINS
SIZ
GROW
VOL
N
43
43
43
43
43
43
43
Minimum
-.280
-7.645
.060
.277
-.905
-.174
.009
Maximum
.179
2.239
.894
235.270
1.945
.463
.759
Mean
.054
-.055
.432
9.893
1.154
.014
.113
Std. Deviation
.075
1.240
.202
3.621
.768
.109
.150
The correlation matrix of small size firms shows (see table IV. 81) that VOL
has significant negative correlation (-0.35) with P_TASSET, while GROW (0.35)
and SIZ (0.37) have significant positive correlation with P_TASSET. With regard to
P_SAL, CAPINS has highly significant negative correlation (-0.92) with P_SAL and
SIZ has significant positive correlation (0.34) with P_SAL.
The regression result shows (see table IV. 82) that SIZ has highly significant
co-efficient (0.04) with P_TASSET in model 2 after removing the effects of CAPINS
and VOL. On the other hand, GROW has a significant negative coefficient (-0.16)
with P_TASSET in model 2, which indicates that the small size firms use their
assets ineffectively for increasing P. CAPINS has highly significant negative
coefficient with P_SAL in models 1 (-0.03) & 2 (-0.03), and SIZ has significant
183
Chapter IV
negative coefficient with (-0.28) P_SAL in model 2, indicating that as the sales
increases they earn a profit with lesser margin or the small size firms increase their
sales by reducing their profit margin. The Adj-R2 value is very low in cases of
P_TASSET (models 1 (0.19) & 2 (0.22)), indicating that model fits poorly for
P_TASSET in case of small size firms. On a contrary, Adj-R2 value is good in case of
P_SAL (models 1 (0.85) & 2 (0.86)), indicating that the regression model fairly fits
for P_SAL. The F-Stat in all the cases is highly significant, indicating that the
variance in predictor variables is related to the variance in the dependent variable.
Table IV. 81
Correlation Matrix of Determinants of P of Small Size Firms of Food Industry in
India
Variables P_TASSET P_SAL
P_TASSET
1
P_SAL
VOL
SIZ
GROW
VOL
CAPINS
GROW
CAPINS
AIP
SIZ
AIP
.370*
(.02)
.351*
(.02)
-.353*
(.02)
-.916**
(.00)
.335*
(.02)
1
.508**
(.00)
-.508**
(.00)
1
.417**
(.00)
1
-.370*
(.02)

184
Chapter IV
Table IV. 82
Results of Regression on Determinants of P of Small Size Firms of Food Industry in
India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat

Dependent variable
P_SAL
Model 1
Model 2
Model 1
Model 2
0.065
.063
.632
.613
(0.03)
(0.02)
(0.00)
(0.00)
-0.091
-.096
-.334
(0.14)
(0.11)
(0.45)
-4.969
-.034**
-.034**
(0.88)
(0.00)
(0.00)
0.038
.044**
-.207
-.284*
(0.06)
(0.00)
(0.15)
(0.014)
0.089
-.143
(0.43)
(0.86)
-0.142
-.161*
.288
(0.06)
(0.02)
(0.59)
0.287
0.274
0.865
0.862
0.190
0.21
0.847
0.855
2.974*
4.918**
47.600**
124.574**
(0.02)
(0.00)
(0.00)
(0.00)
The Kaiser-Meyer-Olkin measure (see table IV. 83) is lesser than 0.60 (0.52)
indicating that the factor analysis result may give only illusionary picture, however
the Bartletts test 2 value (135.44) is highly significant, supporting for conduct of
factor analysis, hence factor analysis (see table IV. 84) is conducted and P_SAL, and
CAPINS converge to form factor 1. Factor 2 constitutes P_TASSET, VOL, and
GROW; and factor 3 constitutes AIP, and SIZ showing the interrelation between
variables grouped as one factor.
185
Chapter IV
Table IV. 83
KMO and Bartlett's Test of Determinants of P of Small Size Firms of Food Industry in India
.520
Bartlett's Test of
Approx. Chi-Square
135.442
Sphericity
df
21
Sig.
.000
Table IV. 84
Factor Analysis of Determinants of P of Small Size Firms of Food Industry in India
Factor
Eigen value
Factor 1
2.608
Factor 2
1.715
Factor 3
1.106
Variable
convergence
P_SAL
Factor
loadings
.965
CAPINS
P_TASSET
VOL
GROW
AIP
SIZ
-.950
.773
-.763
.701
.936
.682
IV.23.2 Analysis of Medium Size Firms

The descriptive statistics of medium sized firms show (see table IV. 85) that
CAPINS shows a high degree of standard deviation while the other variables show a
low degree of standard deviation. SIZ shows the least deviation, indicating that the
firms falling under the category of medium size are quite related with regard to their
size.
The correlation matrix of medium size firms shows (see table IV. 86) that
GROW has highly significant positive correlation (0.52) with P_TASSET. On the
contrary to the prior results, CAPINS has highly significant positive correlation
(0.74) with P_SAL, which indicates that in case of medium sized firms, the less
intensive employment of capital for production has increased their profit margin
186
Chapter IV
while AIP has highly significant negative correlation (-0.55) with P_SAL, indicating
that higher the proportion of current asset in their asset structure, the lower will be
their profit margin, hence, effective employment of capital on fixed asset would help
to improve profit margin. These contradictory inferences are because they have
sacrificed their profit margin to have a higher turnover.
Table IV. 85
Descriptive Statistics of Determinants of P of Medium Size Firms of Food Industry
in India
Variables
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
N
31
31
31
31
31
31
31
Minimum Maximum
-.091
.235
-.020
.259
.138
.826
.154
4.003
1.603
2.686
-.054
.422
.009
.234
Mean
.098
.087
.503
.953
2.292
.131
.062
Std. Deviation
.060
.079
.165
.850
.217
.105
.058
The multiple regression result, on the other hand, shows (see table IV. 87)
that GROW has highly significant coefficients with P_TASSET (models 1 (0.29) &
2 (0.30)), SIZ has significant coefficient (0.09) with P_TASSET in model 2. The adjR2 value (0.34 in model 1 and 0.35 in model 2) shows that the regression model fits
to the extent of 30% in case of P_TASSET. With regard to P_SAL, CAPINS has
highly significant positive coefficient (model 1 (0.07) & 2 (0.07)) with P_SAL. Thus,
the intensity of capital investment in production process is one of the major
determinants of the profit margin in medium size firms. SIZ has a significant
positive coefficient with P_SAL (0.11 in model 1 & 0.10 in model 2 after removing
AIP and VOL). The adj-R2 value is about 60% (0.58 in model 1 and 0.60 in model
2), indicating that the regression model fits the medium size firms about 60%. F-stat
value is highly significant in both the models of P_TASSET and P_SAL.
187
Chapter IV
Table IV. 86
Correlation Matrix of Determinants of P of Medium Size Firms of Food Industry in
India
Variables
P_TASSET
P_SAL
P_TASSET
1
.513**
(.00)
AIP
CAPINS
P_SAL
AIP
SIZ
GROW
VOL
1
-.548**
(.00)
.744**
(.00)
1
-.593**
(.00)
SIZ
GROW
CAPINS
1
1
.516**
(.00)
VOL
1
-.406*
(.02)

The Kaiser-Meyer-Olkin measure (see table IV. 88) is (0.38) discouraging the
conduct of factor analysis. However, the 2 value (88.42) of Bartletts test is highly
significant, indicating that the correlation matrix is not an identity matrix, hence
factor analysis is run. CAPINS, P_SAL, and AIP are grouped into factor 1(see table
IV. 89). Factor 2 constitutes SIZ and VOL, and factor 3 constitutes GROW and
P_TASSET, indicating the interrelation among the variables constituting the factors.
188
Chapter IV
Table IV. 87
Results of Regression on Determinants of P of Medium Size Firms of Food Industry
in India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat

Dependent variable
P_SAL
Model 1
Model 2
Model 1
Model 2
-.028
-.116
-.212
-.226
(0.82)
(0.25)
(0.12)
(0.03)
-.088
-.070
-.047
(0.21)
(0.20)
(0.52)
-.003
.068**
.073**
(0.82)
(0.00)
(0.00)
.065
.091*
.105*
.100*
(0.16)
(0.03)
(0.03)
(0.02)
.294**
.298**
.099
.111
(0.00)
(0.00)
(0.29)
(0.21)
-.234
.074
(0.18)
(0.68)
0.453
0.412
0.651
0.641
0.344
0.346
0.582
0.602
4.140**
6.300**
9.344**
16.104**
(0.00)
(0.00)
(0.00)
(0.00)
Table IV. 88
KMO and Bartlett's Test of Determinants of P of Medium Size Firms of Food
Industry in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.375
88.423
21
.000
189
Chapter IV
Table IV. 89
Factor Analysis of Determinants of P of Medium Size Firms of Food Industry in
India
Factor
Eigen value
Factor 1
2.452
Factor 2
1.705
Factor 3
1.309
Variable
convergence
CAPINS
P_SAL
AIP
SIZ
VOL
GROW
P_TASSET
Factor
loadings
.907
.886
-.799
.834
-.806
.912
.797
IV.23.3 Analysis of Large Size Firms

The descriptive statistics of large size firms show (see table IV. 90) that the P
measured as P_TASSET as well as P_SAL have lesser standard deviation, indicating
that the firms grouped as large size have more or less same level of P_TASSET and
P_SAL while the other variables do not show much deviation.
Table IV. 90
Descriptive Statistics of Determinants of P of Large Size Firms of Food Industry in
India
Variables
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
N
12
12
12
12
12
12
12
Minimum Maximum
.051
.431
.011
.269
.225
.796
.227
2.102
2.684
3.677
.057
.381
.012
.111
Mean
.154
.113
.604
.733
2.984
.182
.043
Std. Deviation
.108
.092
.183
.543
.284
.108
.029
190
Chapter IV
The correlation matrix of large size firms show (see table IV. 91) that
GROW has insignificant negative correlation with P_TASSET (-0.31) and P_SAL (0.50 significant at 10% level). Thus, GROW may not contribute to increase the P in
case of large size firms. CAPINS has highly significant positive correlation (0.81)
with P_SAL as that of the medium size firms while AIP has highly significant
negative correlation (-0.77) with P_SAL. Thus, the intensity of capital employment
as fixed asset, used for production purpose, increases the profit margin of large size
firms as that of the case in medium size firms.
Table IV. 91
Correlation Matrix of Determinants of P of Large Size Firms of Food Industry in
India
Variables P_TASSET P_SAL
P_TASSET
1
P_SAL
AIP
CAPINS
AIP
SIZ
GROW
VOL
1
-.765
1
(.00)
.808 -.625
(.00) (.03)
SIZ
GROW
CAPINS
1
1
.585
(.04)
VOL

Regression results of large size firms show (see table IV. 92) that AIP has
significant negative coefficient (-0.50) with P_TASSET in model 2 after removing
the variables SIZ, GROW, VOL. The adj-R2 value is increased from 0.15 in model 1
to 0.31 in model 2 after removing these variables. However, the problem of
191
Chapter IV
multicolinearity is high, and thus the value of adj-R2 value is very low when
compared to R2 values of both the models. CAPINS has significant positive
coefficient (0.10) with P_SAL in model 1; highly significant positive coefficient with
P_SAL (0.09) in model 2, indicating that even large size firms have to strive hard to
invest in fixed assets to improve their profit margin. VOL also has significant
positive coefficient (1.14) with P_SAL. The adj-R2 value is above 80% in both the
models of P_SAL (0.80 in model 1 and 0.83 in model 2 after removing SIZ and
GROW), indicating that the model is 80% fit and the predictor variables in this
model determine P_SAL above 80%. The F-stat value is highly significant in models
1 ((.94) & 2 (18.60).
Table IV. 92
Results of Regression on Determinants of P of Large Size Firms of Food Industry in
India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat

Dependent
variable Dependent variable
P_TASSET
P_SAL
Model 1
Model 2
Model 1
Model 2
0.161
.534
-.065
.086
(0.72)
(0.00)
(0.72)
(0.26)
-0.434
-.498*
-.149
-.150
(0.12)
(0.02)
(0.19)
(0.11)
-0.092
-.108
.101*
.094**
(0.25)
(0.12)
(0.015)
(0.00)
0.084
.042
(0.48)
(0.39)
0.139
.084
(0.72)
(0.60)
1.086
1.230*
1.137*
(0.39)
(0.04)
(0.02)
0.538
0.436
0.892
0.875
0.152
0.310
0.803
0.828
1.396
3.472
9.942**
18.603**
(0.34)
(0.07)
(0.00)
(0.00)
Note: Figures in parentheses are p values;**Significant at 0.01 level;*Significant at 0.05 level.

192
Chapter IV
The Kaiser-Meyer-Olkin measure (see table IV. 93) shows a low value 0.43,
which is less than the acceptable level (0.60), hence the factor analysis may give only
illusionary results. However, Bartletts Test of sphericity shows a highly significant
2 value (49.28), hence, the factor analysis is run. P_SAL, CAPINS, AIP, GROW,
and VOL constitutes factor 1, and P_TASSET and SIZ constitute factor 2,
indicating high level of interrelation among the variables constituting a factor (see
table IV. 94).
Table IV. 93
KMO and Bartlett's Test of Determinants of P of Large Size Firms of Food Industry
in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.425
49.275
21
.000
Table IV. 94
Factor Analysis of Determinants of P of Large Size Firms of Food Industry in India
Factor
Eigen value
Factor 1
3.453
Factor 2
1.364
Variable
convergence
P_SAL
CAPINS
AIP
GROW
VOL
P_TASSET
SIZ
Factor
loadings
.934
.875
-.837
-.635
.524
.784
.769
IV.24 Income Size-wise Analysis of Determinants of P

Income size-wise grouping is a better approach to analyze the impact of
income size on the P of firms, hence the firms are grouped into three sub-categories
viz., low income size firms with profit (PBITD) < Rs.10 crore; medium income size
193
Chapter IV
firms with profit > Rs.10 crore but < Rs.50 crore; high income size firms with
income >Rs.50 crore. The average income (PBITD) for the period of 10 years under
study is considered as base for the purpose.

The trend line of P_TASSET (see chart IV.U) indicates the comparison of
low income size firms, medium income size firms, and high income size firms. The
low income size firms show a steep fall in the year 2005-06 and a rise thereafter,
while the medium income size firms show a stable level of P_TASSET upto 200506, after which they have a gradual fall in their P_TASSET, indicating that their
ability to effectively use the asset for productive purpose has decreased. Whereas the
high income size firms show a greater fluctuation in establishing their ability to get
stable return on their assets.
Chart IV.U
Trend Line Showing Relation between P_TASSET of Low Income Size Firms,
Medium Income Size Firms and High Income Size Firms
0.25
0.2
0.15
0.1
0.05
P_TASSET FOR LOW

INCOME FIRMS
P_TASSET FOR
MEDIUM INCOME
FIRMS
P_TASSET FOR HIGH
INCOME FIRMS
The trend analysis of P_SAL shows (see chart IV.V) that the low income size
firms follow differential profit margin policy and their profit margin keeps on
fluctuating as that of small size firms (see chart IV.N). The trend line of medium
income size firms and high income size firms has steady P_SAL, indicating their
stable profit margin policy.
194
Chapter IV
Chart IV.V
Trend Line Showing Relation between P_SAL of Low Income Size Firms, Medium
Income Size Firms and High Income Size Firms
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
P_SAL FOR LOW

INCOME FIRMS
P_SAL FOR MEDIUM
INCOME FIRMS
P_SAL FOR HIGH
INCOME FIRMS
-0.8
-1
IV.24.1 Analysis of Low Income Size Firms

The descriptive statistics of low income size firms show (see table IV. 95) that
the mean value of P_SAL is negative (-0.46), indicating the inference as that of the
small size firms. The standard deviation of P_SAL is quite high, indicating that
there is a wide variation in the profit margin of firms of low income size. CAPINS
shows a wide difference between maximum and minimum values. The deviation
from the mean value is also very high, indicating that different firms have different
policies with regard to aggressive employment of capital in productive activities.
However, P_TASSET does not have high standard deviation, indicating that the
ROA employed falls within the closer range among the firms grouped as low income
size.
The correlation matrix of low income size firm show (see table IV. 96) that
VOL has highly significant negative correlation (-0.38) with P_TASSET, while
GROW (0.34) and SIZ (0.29) have significant correlation with the dependent
variables P_TASSET. CAPINS has highly significant negative correlation (-0.91)
with P_SAL in case of low income size firms which is just contrary to that of the
195
Chapter IV
result of large size firms (which showed a highly significant positive correlation).
Hence, the risk factor associated with the intensive employment of capital in asset is
taken into consideration in case of low income size firms. The SIZ has significant
positive correlation (0.29) with P_SAL.
Table IV. 95
Descriptive Statistics of Determinants of P of Low Income Size Firms of Food
Industry in India
Variables
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
N
54
54
54
54
54
54
54
Minimum
-.280
-7.644
.060
.154
-.905
-.174
.009
Maximum
.179
2.239
.894
235.270
2.457
.463
.759
Mean
.053
-.046
.473
7.911
1.367
.036
.104
Std. Deviation
.071
1.103
.196
3.247
.812
.120
.139
The regression result shows (see table IV. 97) that VOL has significant
negative coefficient (-0.17) with P_TASSET in models 1 & 2 (-0.18) after removing
the impact of predictor variables CAPINS and GROW. However, the adj-R2 value is
very low (0.17 in models 1 and 0.18 in model 2), indicating that the regression
model poorly fits in case of P_TASSET of low income size firms. CAPINS has
highly significant negative coefficient with P_SAL in models 1 (-0.03) and 2 (-0.03),
which is contrary to the results of medium size and large size firms (which has
highly significant positive coefficient). SIZ has a significant negative coefficient with
P_SAL in model 2 (-0.23) after removing the variables GROW and VOL, hence the
low income size firms, adopt a policy of low profit margin to increase their turnover.
The results of medium size firms, on the other hand, had positive coefficient,
indicating that after getting established they rise their profit margin. The adj-R2
value is very high in both the models with P_SAL (0.85 in model 1 and 0.86 in
model 2), showing a good model fit and the F-stat value is also highly significant,
indicating the significance of the model.
196
Chapter IV
Table IV. 96
Correlation Matrix of Determinants of P of Low Income Size Firms of Food
Industry in India
Variables
P_TASSET
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
P_SAL
AIP
1
-.912**
CAPINS
(.00)
SIZ
GROW
VOL
.287*
.292*
.599**
-.488**
(.03)
(.03)
(.00)
(.00)
.338*
.279*
.437**
(.012)
(.04)
(.00)
-.381**
-.327*
(.00)
(.012)

The Kaiser-Meyer-Olkin measure (see table IV. 98) is only 0.54, which is not
encouraging the model fit. The Bartletts test of sphericity is highly significant and
so factor analysis (see table IV. 99) is conducted, predictor variables P_SAL and
CAPINS constitute factor 1. Factor 2 constitutes AIP and SIZ while factor 3
constitutes P_TASSET, VOL, and GROW.
197
Chapter IV
Table IV. 97
Results of Regression on Determinants of P of Low Income Size Firms of Food
Industry in India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat

Dependent variable P_SAL
Model 1
Model 2
Model 1
Model 2
.078
.070
.600
.660
(0.00)
(0.01)
(0.00)
(0.00)
-.077
-.084
-.237
-.254
(0.18)
(0.14)
(0.53)
(0.49)
.000
-.034**
-.034**
(0.56)
(0.00)
(0.00)
.020
.031*
-.209
-.231*
(0.24)
(0.03)
(0.06)
(0.02)
.107
-.162
(0.21)
(0.77)
-.165*
-.181**
.251
(0.02)
(0.00)
(0.58)
0.252
0.224
0.865
0.864
0.174
0.177
0.851
0.855
3.240*
4.799**
61.552**
105.573**
(0.013)
(0.00)
(0.00)
(0.00)
Note: The figures in parentheses are p values;**Significant at 0.01 level;*Significant at 0.05

level.
Table IV. 98
KMO and Bartlett's Test of Determinants of P of Low Income Size Firms of Food
Industry in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.542
176.240
21
.000
198
Chapter IV
Table IV. 99
Factor Analysis of Determinants of P of Low Income Size Firms of Food Industry in
India
Factor
Eigen value
Factor 1
2.635
Factor 2
1.726
Factor 3
1.108
Variable
convergence
P_SAL
CAPINS
AIP
SIZ
P_TASSET
VOL
GROW
Factor
loadings
.972
-.947
.914
.783
.825
-.760
.590
IV.24.2 Analysis of Medium Income Size Firms

P_TASSET and P_SAL of medium income size firms have lower standard
deviation (see table IV. 100) unlike the case of low income size firms where the
deviation of P_SAL is considerably high. CAPINS shows a higher deviation when
compared to the other variables, showing the variation in investment policy.
Table IV. 100
Descriptive Statistics of Determinants of P of Medium Income Size Firms of Food
Industry in India
Variables
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
N
22
22
22
22
22
22
22
Minimum Maximum
.051
.235
.011
.293
.138
.826
.227
4.003
1.945
2.947
.018
.422
.010
.120
Mean
.115
.116
.478
1.195
2.408
.148
.047
Std. Deviation
.048
.0788
.197
.985
.259
.104
.031
199
Chapter IV
The correlation matrix of medium income size firms shows (see table IV.
101) that GROW has a significant positive correlation (0.49) with P_TASSET, VOL
also has a significant positive correlation (0.49), indicating that medium income size
firms are risk bearing firms and their P increase with the extent of risk borne by
these firms though it increases VOL. AIP has a highly significant negative
correlation (-0.67) with P_SAL, indicating that lesser investment in current assets
increases the profit margin of the firms. CAPINS has a highly significant positive
correlation (0.80) with P_SAL, and SIZ has a highly significant negative correlation
(-0.76) with P_SAL. Thus, these firms reduce their profit margin to increase sales
unlike the fact in case of low income size firms, which shows a significant positive
correlation with P_SAL as they tend to maintain profit margin to survive. They
dont reduce the margin to boost sales, however, the medium income size firms,
which have a reasonable level of income, bear the risk of reducing the profit margin
to enhance the sales volume.
Table IV. 101
Correlation Matrix of Determinants of P of Medium Income Size Firms of Food
Industry in India
Variables
P_TASSET
P_TASSET
1
P_SAL
-.670
(.00)
.797
(.00)
-.759
(.00)
CAPINS
SIZ
VOL
AIP
CAPINS
SIZ
GROW
VOL
AIP
GROW
P_SAL
1
-.630
(.00)
.636
(.00)
.488
(.02)
.488
(.02)
1
-.656
(.00)
1
1
-.429
(.04)

200
Chapter IV
The regression result shows (see table IV. 102) that CAPINS has highly
removing VOL. As the sales increases, the ROA decreases. The adj-R2 value is above
60% (0.60 in model 1 and 0.60 in model 2), proving that the predictor variables
could determine P_TASSET upto 60%. CAPINS has highly significant positive
coefficient with P_SAL in both the models (0.05 in model 1 and 0.05 in model 2).
The adj-R2 value of both the models of P_SAL is good (0.70 in model 1 and 0.72 in
model 2) and the regression model is 70% fit. The F-stat in the models are highly
significant, indicating that the variance in the predictor variables is related to the
variance in the dependent variables P_TASSET, and P_SAL.
Table IV. 102
Results of Regression on Determinants of P of Medium Income Size Firms of Food
Industry in India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat

Model 1
Model 2
Model 1
Model 2
.374
.456
.247
.353
(0.00)
(0.00)
(0.16)
(0.01)
-.085
-.094
-.027
(0.09)
(0.06)
(0.70)
-.035**
-.040**
.051**
.047**
(0.00)
(0.00)
(0.00)
(0.00)
-.090
-.114**
-.088
-.130*
(0.05)
(0.00)
(0.16)
(0.01)
.180*
.175*
.123
.130
(0.02)
(0.02)
(0. .24)
(0.18)
.278
.346
(0.30)
(0.37)
0.698
0.677
0.775
0.758
0.604
0.601
0.704
0.718
7.400**
8.915**
11.003**
18.832**
(0.00)
(0.00)
(0.00)
(0.00)
Note: Figures in parentheses are p values;**Significant at 0.01 level;*Significant at 0.05 level.
201
Chapter IV
The Kaiser-Meyer-Olkin measure (see table IV. 103) is nearly 0.6 (0.59),
which supports the execution of factor analysis. Bartletts Test of sphericity shows
that the 2 value (91.22) is highly significant and therefore factor analysis is
conducted for medium income size firms, which shows (see table IV. 104) that the
variables converge into two factors. Factor 1 constitutes P_SAL, SIZ, CAPINS and
AIP, while factor 2 constitutes P_TASSET, GROW and VOL.
Table IV. 103
KMO and Bartlett's Test of Determinants of P of Medium Income Size Firms
of Food Industry in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.590
91.215
21
.000
Table IV. 104

Factor Analysis of Determinants of P of Medium Income Size Firms of Food
Industry in India
Factor
Eigen value
Factor 1
3.284
Factor 2
1.872
Variable
convergence
P_SAL
SIZ
CAPINS
AIP
P_TASSET
GROW
VOL
Factor
loadings
.909
-.896
.845
-.814
.935
.624
.621
202
Chapter IV
IV.24.3 Analysis of High Income Size Firms

The descriptive statistics of high income size firms show (see table IV. 105)
that the standard deviation is comparatively low. CAPINS shows comparatively
higher standard deviation while P_TASSET, and P_SAL show a lesser deviation,
indicating that the firms with more or less similar level of P are grouped as high
income size firms.
Table IV. 105
Descriptive Statistics of Determinants of P of High Income Size Firms of Food
Industry in India
Variables
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
N
10
10
10
10
10
10
10
Minimum Maximum
.079
.431
.032
.269
.225
.789
.415
2.102
2.365
3.677
.070
.381
.013
.207
Mean
.179
.161
.537
1.028
2.964
.167
.063
Std. Deviation
.104
.0805
.186
.634
.365
.094
.058
The correlation matrix of high income size firms shows (see table IV. 106)
that GROW has highly significant negative correlation (-0.84) with P_SAL, thus
growth in assets will no more be helpful in boosting the profit margin of high
income size firms. CAPINS has highly significant positive correlation 0.77 with
P_SAL while AIP has highly significant negative correlation (-0.79) with P_SAL.
Profit margin for high income size firms increases when the firms invest their capital
for productive purposes rather than maintaining a higher liquidity level in the form
of current assets, however, the variables are not significantly correlated with the
variable P_TASSET.
The multiple regression result shows (see table IV. 107) that CAPINS has a
removing the predictor variables SIZ and VOL. The adj-R2 value is also good (0.64
203
Chapter IV
in model 1 and 0.72 in model 2), indicating that the independent variables could
predict the dependent variable P_TASSET upto 70%. GROW has significant
negative coefficient (-0.51) with P_SAL whereas, CAPINS has significant positive
coefficient (0.06) with P_SAL, which support the finding of correlation results. The
adj-R2 value is also good (0.67 in model 1 and 0.80 in model 2), making the
regression model fit in determining the dependant variable P_SAL upto 80%. The
F- stat value is also highly significant in model 2 of P_SAL.
Table IV. 106
Correlation Matrix of Determinants of P of High Income Size Firms of Food
Industry in India
Variables
P_TASSET P_SAL
P_TASSET
1
P_SAL
AIP
CAPINS
AIP
CAPINS
GROW
VOL
1
-.792**
(.00)
.768**
(.00)
1
-.665*
(.03)
SIZ
GROW
SIZ
1
1
-.838**
(.00)
.779**
(.00)
VOL

*. Correlation is significant at the 0.05 level (2-tailed).
204
Chapter IV
The Kaiser-Meyer-Oklin measure (see table IV. 108) is 0.55, which is about
0.6 and therefore factor analysis would give a reasonable outcome. The Bartletts test
also shows highly significant 2 value (40.26). The factor analysis result (see table
IV. 109) of high income size firms show that GROW, AIP and P_SAL converges to
form factor 1; and variables SIZ, P_TASSET, CAPINS and VOL converges to form
factor 2 to represent reasonable interrelation between the variables constituting a
factor.
Table IV. 107
Results of Regression of Determinants of P of High Income Size Firms of Food
Industry in India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat

Model 1
Model 2
Model 1
Model 2
.894
.643
.290
.189
(0.06)
(0.00)
(0.32)
(0.00)
-.361
-.353
-.042
(0.15)
(0.09)
(0.79)
-.204*
-.178**
.046
.057*
(0.02)
(0.00)
(0.31)
(0.03)
-.067
-.021
(0.47)
(0.75)
-.633
-.542
-.503
-.514*
(0.17)
(0.13)
(0.14)
(0.011)
-.098
-.093
(0.84)
(0.80)
0.839
0.813
0.853
0.846
0.638
0.720
0.669
0.802
4.177
8.697*
4.637
19.180**
(0.09)
(0.01)
(0.08)
(0.00)
Note: Figures in parentheses are p values;**.Significant at 0.01 level;*.Significant at 0.05 level

205
Chapter IV
Table IV. 108

KMO and Bartlett's Test of Determinants of P of High Income Size Firms of Food
Industry in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.554
40.259
21
.007
Table IV. 109

Factor Analysis of Determinants of P of High Income Size Firms of Food Industry
in India
Factor
Eigen value
Factor 1
3.663
Factor 2
1.782
Variable
convergence
GROW
AIP
P_SAL
SIZ
P_TASSET
CAPINS
VOL
Factor
loadings
-.943
-.903
.901
.830
.739
-.734
-.552
IV.25 Sector-wise Analysis of Determinants of P

Sector wise analysis is done by grouping firms having same business
environment and then finding their P because it has a great impact on P of the
firms. Since there is more number of sectors with firms of few in numbers, the firms
are combined and grouped into three sectors constituting related firms. Sector I
constitutes 32 vegetable oil firms; Sector II constitutes 30 firms, which include 9
firms of tea sector, 11 firms of dairy sector, and 10 firms of sugar sector; Sector III
constitutes 24 firms comprising of miscellaneous sectors, which include coffee, cocoa
products & confectionery, bakery products, processed /packaged foods, starches,
206
Chapter IV
marine food, poultry & meat product, floriculture, milling products, and other
agricultural products.
The trend analysis of Sector I, Sector II and sector III shows (see chart IV.W)
that there is a high degree of fluctuation in the size of P_TASSET over the period
under study for firms grouped under all sectors, however the firms belonging to
sector III show a rising trend in their efficiency to show a good return during the
end of the period of analysis. The trend line of the sector I shows a fall in the year
2008-09, whereas sector II shows considerable rise in P_TASSET.
Chart IV. W
Trend Line Showing Comparison between P_TASSET of Firms of Sector I, Sector II and
Sector III
0.18
0.16
0.14
0.12
0.1
0.08
P_TASSET SECTOR I
0.06
P_TASSET SECTOR II
0.04
P_TASSET SECTOR III
0.02
0
The trend line shows (see chart IV. X) that sector II constitutes firms that use
varied profit margin policy as that of the low income size as well as that of the small
size firms. Sector II shows a rise in their P_SAL as they had a rising trend in
P_TASSET, whereas sector I follows a steady profit policy, and their P_SAL is quite
steady over the years of analysis.
207
Chapter IV
Chart IV. X
Trend Line Showing Relation between P_SAL of Firms of Sector I, Sector II and
Sector III
1.5
1
0.5
0
P_SAL SECTOR I
P_SAL SECTOR II
-0.5
P_SAL SECTOR III
-1
-1.5
-2
IV.25.1 Analysis of Sector I

The descriptive statistics of sector I show (see table IV. 100) that CAPINS
and P_SAL have higher standard deviation, revealing that sector I constitutes firms
with varied profit margin and varied capital investment policy. The SIZ, however,
does not show high standard deviation. The firms range from firms with negative
GROW, to firms with high positive GROW which shows that the sector I
constitutes both the group of firms that are capable of using their assets effectively
and the firms which do not effectively use their assets for generating profit.
The correlation matrix result of sector I shows (see table IV. 110) that
GROW has significant positive correlation (0.45) with P_TASSET, which shows
that the firms use their assets efficiently to increase P. SIZ has highly significant
negative correlation (-0.56) with P_SAL, indicating that profit margin reduces with
increase in sales. CAPINS has highly significant positive correlation (0.91) with
P_SAL, encouraging effective use of funds for the purpose of production while AIP
has highly significant negative correlation (-0.60) with P_SAL.
208
Chapter IV
Table IV. 110

Descriptive Statistics of Determinants of P of Firms of Sector I of Food Industry in
India
Variables
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
N
32
32
32
32
32
32
32
Minimum Maximum
-.091
.250
-.022
.651
.204
.768
.154
24.982
-.845
3.677
-.061
.422
.013
.570
Mean
.077
.0568
.587
1.491
2.006
.099
.074
Std. Deviation
.061
.114
.122
4.434
.847
.129
.105
Table IV. 111

Correlation Matrix of Determinants of P of Firms of Sector I of Food Industry in
India
Variables
P_TASSET P_SAL
P_TASSET
1
P_SAL
CAPINS
SIZ
GROW
VOL
AIP
-.597
(.00)
.911
(.00)
-.557
(.00)
CAPINS
SIZ
GROW
AIP
.445
(.011)
1
-.543
(.00)
.417
(.018)
.378
(.03)
1
-.676
(.00)
1
.566
(.00)
VOL
1
-.396
(.02)

209
Chapter IV
The regression result shows (see table IV. 112) that GROW has a significant
positive coefficient with P_TASSET in model 1 (0.27*) and (0.27**) in model 2 after
removing the effects of SIZ and VOL. On the other hand, AIP has a significant
negative coefficient with P_TASSET in models 1 (-0.26*) & 2 (-0.26**) encouraging
an aggressive investment policy for firms belonging to sector I. The adj-R2 value is
low (0.27 in model 1 and 0.31 in model 2) for P_TASSET indicating that there are
other variables which could better predict P_TASSET. CAPINS has highly
significant positive coefficient with P_SAL (0.02 in model 1 and 0.02 in model 2)
and AIP has significant negative coefficient with P_SAL (-0.20 in model 1 & 2) after
removing SIZ and VOL. GROW has highly significant positive coefficient (0.18)
with P_SAL in model 2, indicating that investments in assets increases the profit
margin of the firms. Thus, sector I has high scope of growth opportunities and more
investment increases the profit margin of the firms. The adj-R2 value is high in both
the models of P_SAL (0.86 in model 1 and 0.87 in model 2), indicating that the
regression model fits 86% and the variables are the major determinants of P_SAL.
Table IV. 112
Results of Regression on Determinants of P of Firms of Sector I of Food Industry in India
Variables
Model 1
Model 2
Model 1
Model 2
(Constant)
.197
.212
.130
.124
(0.01)
(0.00)
(0.05)
(0.01)
AIP
-.258*
-.264**
-.201*
-.199*
(0.014)
(0.00)
(0.02)
(0.015)
CAPINS
-.004
-.004
.021**
.022**
(0.28)
(0.08)
(0.00)
(0.00)
SIZ
.004
-.003
(0.83)
(0.85)
GROW
.267*
.267**
.184*
.175**
(0.011)
(0.00)
(0.03)
(0.01)
VOL
.036
.001
(0.72)
(0.98)
R2 2
0.383
0.380
0.878
0.878
Adj-R
0.265
0.314
0.855
0.865
F Stat
3.234*
5.725**
37.581**
67.336**
(0.02)
(0.00)
(0.00)
(0.00)

210
Chapter IV
The Kaiser- Meyer- Oklin test (see table IV. 113) has a value above 0.60
(0.63) and therefore the conduct of factor analysis is acceptable. The Bartletts test
also shows highly significant 2 value (130.17) and so factor analysis is run. P_SAL,
CAPINS, AIP and SIZ converge to form factor 1(see table IV. 114). Factor 2
constitutes VOL and GROW. And factor 3 constitutes P_TASSET, showing that the
dependent variable does not have much of interrelation with the other variables.
Table IV. 113
KMO and Bartlett's Test of Determinants of P of Firms of Sector I of Food Industry
in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.626
130.170
21
.000
Table IV. 114

Factor Analysis of Determinants of P of Firms of Sector I of Food Industry in India
Factor
Eigen value
Factor 1
3.138
Factor 2
1.664
Factor 3
1.062
Variable
convergence
P_SAL
CAPINS
AIP
SIZ
VOL
GROW
P_TASSET
Factor
loadings
.957
.935
-.736
-.677
-.898
.648
.947
IV.25.2 Analysis of Sector II

The descriptive statistics of sector II shows (see table IV. 105) that the mean
value of P_SAL is negative and the standard deviation in respect of it is also high,
which indicates that the firms in sector II range from firms incurring loss to firms
211
Chapter IV
earning good profit. The CAPINS value also shows a high degree of standard
deviation indicating the varied investment policy followed by firms in sector II. The
other variables, however, comparatively show a lesser standard deviation.
Table IV. 115
Descriptive Statistics of Determinants of P of Firms of Sector II of Food Industry in
India
Variables
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
N
30
30
30
30
30
30
30
Minimum
-.015
-7.645
.115
.317
-.905
-.066
.009
Maximum
.431
.293
.808
235.270
3.385
.463
.289
Mean
.101
-.138
.398
9.902
1.976
.093
.063
Std. Deviation
.086
1.421
.181
4.264
.925
.122
.056
The correlation matrix of sector II shows (see table IV. 116) that SIZ has
highly significant positive correlations with P_TASSET (0.67) and with P_SAL
(0.61). CAPINS has highly significant negative correlation (-0.99) with P_SAL while
the other predictor variables have insignificant correlation with the two dependent
variables.
The regression results of sector II show (see table IV. 117) that SIZ has
highly significant coefficients with P_TASSET in both the models (0.09 in models 1
& 2 after removing the predictor variables GROW and VOL). The Adj-R2 value is
about 40% (0.44 in model 1 and 0.47 in model 2), indicating that the regression
model fits to about 40%. CAPINS has a significant negative coefficient with P_SAL
in both the models (-0.03 in models 1& 2 after removing SIZ and GROW). AIP also
has high significant negative coefficient with P_SAL in both the models (-0.43 in
model 1and -0.42 in model 2).
212
Chapter IV
Table IV. 116

Correlation Matrix of Determinants of P of Firms of Sector II Food Industry in
India
Variables
P_TASSET
P_TASSET P_SAL
1
P_SAL
CAPINS
SIZ
GROW
VOL
AIP
CAPINS
SIZ
AIP
.669**
(.00)
-.996**
(.00)
.606**
(.00)
1
.402*
(.02)
GROW
-.621**
(.00)
1
.394*
(.03)
VOL

The Kaiser-Meyer-Olkin measure (see table IV. 118) is only 0.53, which does
not support to conduct of factor analysis, however the Bartletts test 2 value
(182.31) is highly significant, hence the correlation matrix is not an identity matrix
and so factor analysis can be carried out. The factor formation shows (see table IV.
119) that P_SAL and CAPINS converge to form factor 1. P_TASSET, SIZ, GROW
converge to form factor 2. Factor 3 comprises of the variables VOL and AIP.
213
Chapter IV
Table IV. 117

Results of Regression on Determinants of P of Firms of Sector II of Food Industry
in India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat

Model 1
Model 2
Model 1
Model 2
-.046
-.033
.379
.400
(0.29)
(0.39)
(0.00)
(0.00)
-.105
-.111
-.431**
-.416**
(0.17)
(0.13)
(0.00)
(0.00)
.001
.001
-.033**
-.033**
(0.12)
(0.12)
(0.00)
(0.00)
.087**
.087**
.016
(0.00)
(0.00)
(0.60)
.002
-.095
(0.98)
(0.59)
.160
-.628
-.657
(0.47)
(0.09)
(0.07)
0.533
0.522
0.995
0.995
0.436
0.467
0.994
0.995
5.476**
9.481**
1025.626**
1818.784**
(0.00)
(0.00)
(0.00)
(0.00)
Note: The figures in parentheses are p values;**.Significant at 0.01 level;*.Significant at 0.05

level.
Table IV. 118

KMO and Bartlett's Test of Determinants of P of Firms of Sector II of Food
Industry in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.526
182.312
21
.000
214
Chapter IV
Table IV. 119

Factor Analysis of Determinants of P of Firms of Sector II of Food Industry in India
Factor
Eigen value
Factor 1
3.006
Factor 2
1.247
Factor 3
1.076
Variable
convergence
P_SAL
CAPINS
P_TASSET
SIZ
GROW
VOL
AIP
Factor
loadings
.981
-.971
.711
.710
.705
.860
-.590
IV.25.3 Analysis of Sector III

The descriptive statistics of firms of sector III show (see table IV. 120) that
CAPINS has high standard deviation. The firms, however, have negative and
positive P, indicating that the firms falling under sector III comprises of firms with
negative P to firms having reasonably good P. The other variables, however, dont
show much deviation.
The correlation matrix of sector III shows (see table IV. 121) that GROW has
highly significant positive correlation (0.59) with P_TASSET, indicating that
investment in asset would increase its P_ASSET. SIZ has significant positive
correlation with P_TASSET, indicating that P increase with SIZ. On the other
hand, there are no variables significantly correlated with P_SAL.
The multiple regression result shows (see table IV. 122) that VOL has
significant negative coefficient (-0.30) with P_ASSET in model 1 and highly
significant coefficient (-0.33) with P_TASSET in model 2 after removing the
variables CAPINS and GROW. SIZ has significant positive coefficient (0.07) with
P_TASSET in model 2 while AIP has significant negative coefficient (-0.19) with
P_TASSET. The Adj- R2 values are 0.46 in model 1 and 0.51 in model 2 of
P_TASSET. Hence, the model fit is good in case of P_TASSET, however, no other
variables show significant coefficients with P_SAL. The R2 (0.13) and the Adj-R2 (0.11) values are low in case of P_SAL, indicating that the model poorly fits for
P_SAL in sector III.
215
Chapter IV
Table IV. 120

Descriptive Statistics of Determinants of P of Firms of Sector III of Food Industry in
India
Variables
P_TASSET
P_SAL
AIP
CAPINS
SIZ
GROW
VOL
N
24
24
24
24
24
24
24
Minimum Maximum
-.280
.235
-.379
2.239
.060
.894
.337
49.051
-.413
2.804
-.174
.316
.009
.759
Mean
.071
.167
.446
4.956
1.373
.037
.127
Std. Deviation
.100
.471
.229
1.020
.823
.122
.166
Table IV. 121

Correlation Matrix of Determinants of P of Firms of Sector III Food Industry in
India
Variables
P_TASSET P_SAL
P_TASSET
1
P_SAL
AIP
CAPINS
VOL
VOL
CAPINS
GROW
GROW
AIP
SIZ
SIZ
1
.491
(.015)
.585
(.00)
-.629
(.00)
.639
(.00)
1
.676
(.00)
1
-.486
(.016)

216
Chapter IV
Table IV. 122

Results of Regression of Determinants of P of Firms of Sector III of Food Industry
in India
Variables
(Constant)
AIP
CAPINS
SIZ
GROW
VOL
R2
Adj-R2
F Stat

Dependent variable P_TASSET Dependent variable P_SAL
Model 1
Model 2
Model 1
.108
.106
.213
(0.02)
(0.01)
(0.49)
-.175
-.192*
-.612
(0.07)
(0.03)
(0.34)
.000
.004
(0.91)
(0.70)
.053
.067*
.084
(0.12)
(0.011)
(0.71)
.137
.091
(0.47)
(0.94)
-.300*
-.327**
.686
(0.011)
(0.00)
(0.35)
0.590
0.577
0.131
0.475
0.514
-0.110
5.170
9.099**
0.543
(0.00)
(0.00)
(0.74)
Note: Figures in parentheses are p values;**.Significant at 0.01 level;*.Significant at 0.05 level
The Kaiser-MeyerOlkin test (see table IV. 123) shows that the factor
analysis may give only tentative result. But the Bartletts test (see table IV. 124) has
highly significant 2 value, indicating that the correlation matrix is not an identity
matrix and factor analysis shall be conducted. The factor analysis formation shows
that P_TASSET, GROW, SIZ, VOL and CAPINS are interrelated and can be
grouped as factor 1. Factor 2 constitutes P_SAL and AIP.
217
Chapter IV
Table IV. 123

KMO and Bartlett's Test of Determinants of P of Firms of Sector III of Food
Industry in India
Bartlett's Test of
Approx. Chi-Square
Sphericity
df
Sig.
.490
71.585
21
.000
Table IV. 124

Factor Analysis of Determinants of P of Firms of Sector III of Food Industry in
India
Factor
Eigen value
Factor 1
3.032
Factor 2
1.430
Variable
convergence
P_TASSET
GROW
SIZ
VOL
CAPINS
P_SAL
AIP
Factor
loadings
.876
.827
.770
-.694
-.452
.855
-.698
IV.26 Conclusion
IV.26.1 Overall Analysis
The overall result of equation II, which aims at finding out the determinants
of P in food industry shows that the GROW and SIZ have highly significant positive
correlation with P_TASSET while VOL has highly significant negative correlation
with P_TASSET, hence the hypotheses Ho17, and Ho18 are rejected, and hypotheses
Ho15 and Ho16 are accepted in case of P_TASSET. On the other hand, CAPINS has
a significant negative correlation with P_SAL which coincides with the results of
Ghemawat and Caves (1986)89, while SIZ has significant positive correlation with
218
Chapter IV
P_SAL, thus the hypotheses Ho16 is rejected and the hypotheses Ho15, Ho17, Ho18 are
accepted. The summary of the findings of the determinants of P is given in table IV.
125.
IV.26.2 Sales Size Wise Analysis
The size wise analysis shows different results because SIZ, and GROW have
significant positive correlation with P_TASSET in case of small size firms while
VOL has significant negative correlation with P_TASSET. CAPINS has a significant
negative correlation with P_SAL while SIZ has a significant positive correlation
with P_SAL, thus the hypotheses Ho17, and Ho18 are rejected in case of P_TASSET
while, hypotheses Ho16 is rejected in case of P_SAL.
Table IV.125
Summary of Overall Results of the Determinants of P
Hypotheses
relationship between aggressive
investment policy and
profitability.
relationship between capital
intensity and profitability.
relationship between volatility
and profitability.
Ho18= There is no significant
relationship between growth
and profitability.
P_TASSET
P_SAL
Accepted
Accepted
Accepted
+ve**
Rejected
-ve**
Rejected
Accepted
+ve**
Rejected
Accepted
The correlation analysis result of medium size firms show that GROW has a
significant correlation with P_TASSET. SIZ, on the contrary, it has a highly
significant negative relation with P_SAL, which proves that they have sold the
products with low profit margin to increase the turnover. This explains why
219
Chapter IV
CAPINS has a significant positive correlation with P_SAL unlike in the findings of
small size firms. AIP has a significant negative correlation with P_SAL. GROW has
a highly significant negative correlation with P_SAL in case of large size firms
proving that they can use the assets effectively only to certain extent. CAPINS has a
significant positive correlation with P_SAL and AIP has significant negative
correlation with P_SAL for the medium size firms and large size firms. The
summary of the findings of sales size-wise analysis is given in table IV. 126.
Table IV.126
Summary of Sales Size-wise Analysis of the Determinants of P
Hypotheses
Ho15 = There is no
between aggressive
investment policy and
profitability.
Ho16 = There is no
between capital intensity
and profitability.
Ho17 = There is no
profitability.
Ho18= There is no
between growth and
profitability.
Small Size Firms

P_TASSET P_SAL
Medium Size Firms

P_TASSET P_SAL
Large Size Firms

P_TASSET P_SAL
Accepted
Accepted
Accepted
-ve**
Rejected
Accepted
-ve**
Rejected
Accepted
-ve*
Rejected
Accepted
+ve**
Rejected
Accepted
+ve**
Rejected
-ve*
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
+ve*
Rejected
Accepted
+ve*
Rejected
Accepted
Accepted
Accepted
220
Chapter IV

In income sizes wise analysis shows that SIZ, and GROW have significant
positive correlation with P_TASSET while VOL has significant negative correlation
with P_TASSET in low income size firms. CAPINS has a significant negative
correlation with P_SAL while SIZ has a significant positive correlation with P_SAL,
thus the hypotheses Ho17, and Ho18, are rejected in case of P_TASSET while,
hypothesis Ho16 is rejected in case of P_SAL.
The analysis of medium income size firms shows that GROW and VOL have
significant correlation with P_TASSET. On the contrary to the prior result, SIZ has
significant negative correlation with P_SAL. CAPINS has a significant positive
correlation with P_SAL while AIP has highly significant negative correlation with
P_SAL.
The high income size firms result shows that GROW has highly significant
negative correlation with P_SAL, showing that the firms cannot effectively use asset
after certain level. CAPINS has a significant positive correlation with P_SAL while
AIP has significant negative correlation with P_SAL. These findings lead to
rejection of Ho19 that there is no significant influence of size in deviating the
relationship between the predictor variables and profitability of the firms. The
summary of the results of income size-wise analysis is given in table IV. 127.
The sector wise analysis shows that CAPINS has a significant positive
correlation with P_SAL while SIZ and AIP have significant negative correlation
with P_SAL in sector I. However, GROW has significant positive correlation with
P_TASSET. The analysis of sector II shows that SIZ has significant positive
correlation with P_TASSET and P_SAL whereas, CAPINS has significant negative
correlation with P_SAL. The analysis of sector III shows that SIZ, and GROW have
significant positive correlation with P_TASSET while VOL has a significant
221
Chapter IV
negative correlation with P_TASSET which fact is similar to that of the small size
firms although there are no significant predictor variables influencing P_SAL. The
relation between the predictor variables and P has differed in respect of sectors to
which they belong to, and hence, the hypothesis Ho20 is rejected (see table IV. 128).
Table IV.127
Summary of Income Size-wise Analysis of the Determinants of P
Hypotheses
15
Ho = There is no
significant
relationship between
aggressive
investment policy
and profitability.
Ho16 = There is no
significant
capital intensity and
profitability.
Ho17 = There is no
significant
volatility and
profitability.
Ho18= There is no
significant
growth and
profitability.
Low Income Size Firms
Medium Income Size

Firms
P_TASSET P_SAL
P_TASSET
P_SAL
Accepted
Accepted
Accepted
Accepted
-ve**
Rejected
-ve**
Rejected
+ve*
Rejected
High Income Size Firms
P_TASSET
P_SAL
-ve**
Rejected
Accepted
-ve**
Rejected
Accepted
+ve*
Rejected
Accepted
+ve**
Rejected
Accepted
+ve*
Rejected
Accepted
Accepted
Accepted
Accepted
+ve*
Rejected
Accepted
Accepted
-ve**
Rejected
222
Chapter IV
Table IV.128
Summary of Sector-wise Analysis of the Determinants of P
Hypotheses
aggressive investment
policy and profitability.
capital intensity and
profitability.
volatility and
profitability.
Ho18= no significant
growth and
profitability.
Sector I Firms
P_TASSET P_SAL
Sector II Firms
P_TASSET P_SAL
Sector III Firms

P_TASSET P_SAL
Accepted
-ve**
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
+ve**
Rejected
Accepted
-ve**
Rejected
Accepted
Accepted
Accepted
Accepted
Accepted
Accepted
-ve**
Rejected
Accepted
+ve*
Rejected
Accepted
Accepted
Accepted
+ve**
Rejected
Accepted
IV.27 Concluding Remarks

Food industry in India is a rising industry with greater scope for developing
as a major contributor to the gross domestic product (GDP) of India. Research
about this industry at this point of time would enhance its development. The
preliminary analysis, which aims at finding out the relation between PBITD and the
different constituents of CS have proved that PBITD is an insignificant determinant
of CS in case of small size and low income size firms while, it is the significant
determinant of equity capital in respect of large size firms and high income size
firms.
The overall analysis of the determinants of LEV shows that P has significant
positive correlation with LEV, proving that the firms of food industry rely more on
external funds as their P increases. However, the relation between P and LEV is the
223
Chapter IV
contrary as the size of the firm increases. The medium income size firms show that
P has positive coefficient with LEV while high income size firms show that P has
significant negative coefficient with LEV. So, as their size increases, they use retained
earnings and rely less on external borrowings. The equation I regression model fits
over 80% in case of high income size firms indicating that the explaining variables
determines the variance in LEV over 80%. There are various factors influencing the
LEV of different sectors.
SIZ, GROW, and VOL are considered as the important determinants of

P_TASSET and CAPINS and AIP are found to be the major determinants of
P_SAL. CAPINS and AIP have negative relation with P_SAL, indicating that
intensive use of capital for production purpose will increase the profit margin of the
firms. But CAPINS shows a positive correlation with P_SAL in case of medium
size, large size, medium income size and high income size firms which is supported
by a negative relation between SIZ and P_SAL. This fact shows that these firms
have increased their sales by reducing their profit margin, which fact proves the
positive relation between CAPINS and P_SAL indicating that the profit has
decreased with intensive use of asset for increasing sales.
224
Chapter IV
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73

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75
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Friend, I., and J. Hasbrouck. 1988. loc. cit.
77
Friend, I., and L. Lang. 1988. loc. cit.
78
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229

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Chapter IV

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

DETERMINANTS OF PROFITABILITY AND CAPITAL

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

long term debt of the firms.

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

equity capital of the firms.

IV.4 Research Methods

The overall trend analysis of selected 86 sample firms in food industry,

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

remains more or less same without significant fluctuations, hence it reveals to be

Short term debt

Long term debt

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

**. Correlation is significant at 0.01 level (2-tailed).

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

Unstandardized Coefficients Standardized

LONG TERM DEBT

SHORT TERM DEBT

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

SMALL SIZE FIRMS

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

MEDIUM SIZE FIRMS

LARGE SIZE FIRMS

IV.6.1 Correlation Co-efficient and Regression Results of Constituents of CS of

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

LONG TERM DEBT

SHORT TERM DEBT

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

IV.6.2 Correlation Co-efficient and Regression Results of Constituents of CS of

Source: Computed results based on compiled data collected from CMIE

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

LONG TERM DEBT

SHORT TERM DEBT

Source: Computed results based on compiled data collected from CMIE

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

IV.6.3 Correlation Co-efficient and Regression Results of Constituents of CS of

**. Correlation is significant at 0.01 level (2-tailed).

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

Unstandardized Coefficients Standardized

LONG TERM DEBT

SHORT TERM DEBT

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

LOW INCOME SIZE

A STUDY ON THE DETERMINANTS OF CAPITAL STRUCTURE AND PROFITABILITY

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS

LOW INCOME SIZE

DETERMINANTS OF PROFITABILITY AND CAPITAL STRUCTURE: ANALYSIS