Dynamic Adjustment of Capital Structure under Bankruptcy Regime: Evidence from Indian Large-Cap Firms

This study investigates the determinants of capital structure and the dynamics of adjustment towards optimal leverage among the top 100 Indian large-cap firms over the period 2009–10 to 2024–25. Employing a dynamic panel framework with Driscoll-Kraay standard errors, the study estimates the speed of adjustment (SOA) towards target capital structure and evaluates the relative validity of the Trade-Off Theory (TOT) and the Pecking Order Theory (POT). The results confirm a high degree of leverage persistence, with firms adjusting approximately 30–34% annually towards their target, thereby supporting the Dynamic Trade-Off Theory. Profitability exhibits a strong negative relationship with leverage, validating the dominance of the Pecking Order Theory. Contrary to static trade-off predictions, tax shields and asset tangibility are found to be statistically insignificant. Inflation emerges as a significant macroeconomic determinant of borrowing behaviour. Robustness is established through clustered standard errors, two-way fixed effects, and instrumental variable estimations.