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2014•Asian Journal of Research in Banking and FinanceRequires access

The Relationship between Capital Structure & Profitability of Public Sector Banks in India

A. M. Goyal

Open publisher page 1 citations

Abstract

This study seeks to provide evidence on the impact of capital structure on the performance of Indian public sector banks as measured from their Return on Equity (ROE). The analysis has been done on a sample of 19 public sector banks from 2008 to 2012. The findings of study validated a positive relationship between short term debt to capital (STDTC) and profitability as measured by ROE. Long term debt to capital (LTDTC) Total debt to capital (TDC) and Total assets(LTA) are found to have a negative relationship with Return on Equity (ROE). Results also indicated that there exists a positive relationship between Size (log of total assets) and profitability (i.e. ROE) of Indian public sector banks. This supports the theory that debts are relatively cheaper than equity and hence increase the Return on Equity Booth et al. (2001).

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What this paper is about

This study seeks to provide evidence on the impact of capital structure on the performance of Indian public sector banks as measured from their Return on Equity (ROE). The analysis has been done on a sample of 19 public sector banks from 2008 to 2012. The findings of study validated a positive relationship between short term debt to capital (STDTC) and profitability as measured by ROE. Long term debt to capital (LTDTC) Total debt to capital (TDC) and Total assets(LTA) are found to have a negative relationship with Return on Equity (ROE). Results also indicated that there exists a positive relationship between Size (log of total assets) and profitability (i.e. ROE) of Indian public sector banks. This supports the theory that debts are relatively cheaper than equity and hence increase the Return on Equity Booth et al. (2001).

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Available abstract

This study seeks to provide evidence on the impact of capital structure on the performance of Indian public sector banks as measured from their Return on Equity (ROE). The analysis has been done on a sample of 19 public sector banks from 2008 to 2012. The findings of study validated a positive relationship between short term debt to capital (STDTC) and profitability as measured by ROE. Long term debt to capital (LTDTC) Total debt to capital (TDC) and Total assets(LTA) are found to have a negative relationship with Return on Equity (ROE). Results also indicated that there exists a positive relationship between Size (log of total assets) and profitability (i.e. ROE) of Indian public sector banks. This supports the theory that debts are relatively cheaper than equity and hence increase the Return on Equity Booth et al. (2001).

Key concepts: Return on equity, Profitability index, Capital structure, Return on capital, Return on capital employed, Capital adequacy ratio, Debt, Public sector

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