Revisiting the Nexus Between Capital Structure and Dividend Policy: An Empirical Investigation via Incorporating Micro and Macro-Economic Policy Factors in India

Abstract

The study aims to explore the interrelationship between capital structure and dividend policy in the context of Indian companies listed on the National Stock Exchange. The study employs the Simultaneous Equations Model (SEM) and Two-Stage Least Squares (TSLS) methodology due to the endogeneity issue to the balanced panel data of Nifty-200 companies listed on the National Stock Exchange (NSE) in India from 2013 to 2022. The empirical results indicate that both capital structure and dividend policy are positively interrelated with each other. The results also show that the debt to equity ratio positively relates to its lagged value, size, and inflation whereas the lagged value of the dividend payout ratio and the return on assets have a positive relationship with the dividend payout ratio for the sampled non-financial and financial companies. On the other hand, Gross Domestic Product (GDP) negatively relates to the dividend payout ratio for both non-financial and financial companies, while business risk has a negative relation with the dividend payout ratio in non-financial companies but is found to be positive in financial companies. Previous researchers have examined the effect of various determinants on the financial decisions of the companies. However, there is rarely any study grasping the interrelationship between capital structure and dividend policy while specifically incorporating both types of variables (i.e. firm-specific and macroeconomic) in the Indian context.

Keywords: Capital Structure, Dividend Policy, Interrelationship, Two Stage Least Squares, Economic Growth and Inflation

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