THE IMPACT OF CAPITAL STRUCTURE ON MARKET VALUE & PROFITABLITY OF THE INDIAN BANKS

Abstract

One of the main objectives of a firm management is to maximise the wealth of the owners or shareholders of the firm. Shareholder wealth in turn is defined as the current price of the firm’s outstanding ordinary shares. This objective could be achieved by taking rational financing decisions regarding optimal capital structure which would minimise its cost of capital. The capital structure of a firm is the mix of debt including preference stock and equity; this is referred to as the firms’ long term financing mix. The paper seeks to study the impact of capital structure on profitability of public sector banks in India listed on national stock exchange. Regression Analysis has been used for establishing relationship between CAR, Return on Assets & P/B RATIO. The CAR is found to have positive impact on the market value of the firm as the investors tend to give more value or multiple to a bank having quality capital and less risk when compared to a bank having more risky capital structure. The CAR was found to have positive impact on the profitability of the banks in the Indian banking sector. The positive impact on the profitability can be discussed on the basis of the fact that the maintenance of quality capital in the balance sheet restricts the flow of loans to highly risky ventures. Also, the profitability also depends on the various other factors like 1. Good management 2. Area of operation etc.