A study on financial constraints of capital structure theories and dividend policy: evidence from Indian capital market

Abstract

The study focuses on the ability of firms which is determined by the structure of the financial system in which they operate, and in particular whether this financial system is able to make capital available efficiently to those firms that need it. The study examines the relation between the Financing, Investments, Capital Budget and Dividend decisions where the effect of financial constraints on the firm's investment decision is investigated. The study focuses on how financial constraints affect different firms by investigating the extent to which the dependence on internal cash flow is affected by firm characteristics such as size, age, dividend payout ratio, and market listing. This implies that firms retain earnings (RE) in order to ensure that they have sufficient capital to invest, confirming the initial result that Indian firms are financially constrained. This study adopted a descriptive design that aims at exploring the financial constraints of dividend policy and capital structure theories of companies listed at NSE & BSE in India. The data was obtained from financial statements and balance sheet of all the listed companies’ information available at the NSE and BSE for 10 years from 2005 to 2015.