An Assessment of The Suitability of Financing Patterns in The Indian Automobile Industry: A Comprehensive Comparison of the Pecking Order and Trade-Off Approaches

Abstract

The Pecking Order Theory and Trade-off Theory propose their distinct approaches to finance a firm’s investments. The automobile industry, being a capital intensive one, also lingers extremely cautious about its strategies of employing finance for its investment. Hence, this paper is focused to empirically examine the financing pattern that is being followed by the Indian automobile industry and identify which out of the two prominent approaches best describes the financing strategies applied by the industry. The paper is descriptive and empirical research based on the panel data of 11 leading automobile companies, operating under BSE /NSE, for the period of 10 years from 2009-10 to 2018-19. It used descriptive statistics and Linear Trend Model on several leverage ratios and found that the automobile industry in India closely follows the pecking order approach and largely rely on its retained earnings.