Purpose The purpose of this study is to investigate the dynamics of capital structure for businesses in China and India. Whether and how they adjust their capital structures to witness the trade-off behaviour in the light of different macro-level factors. Design/methodology/approach Firms listed on the National Stock Exchange and Shanghai Stock Exchange over the period of 2009-2018 are used for the study. System generalized method of moments proposed by Blundell and Bond (1998) is deployed due to the use of dynamic short panel data. Findings Indian firms revert to their target leverage ratios at a higher rate as compared to Chinese firms (30 and 20 per cent, respectively). Further, the inflation rate, bond market and stock market development are significant factors impacting leverage in the case of India, whereas bond market development significantly impacts leverage in the case of China. These results are robust across various definitions of leverage and other firm and institutional control variables. Research limitations/implications This study has implications for various stakeholders. The study highlights that development in financial markets and economy impact the financing decisions and should be a cause for concern for the financial managers and policymakers. Thus, managers can use the findings of the study if they desire to maintain their target capital structures for better firm valuation and the policymakers can support them in achieving the same. Even, the investors can make informed investment decisions considering macro-level factors impacting firms’ financing choices. Originality/value It is believed to be the first piece of research effort to consider the novel paradigm of the macro-level factors impacting the target leverage to estimate the adjustment speed. Secondly, it is a pioneering study, which attempts to compare the trade-off behaviour of the top two emerging economies of the world.

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PurposeThe present study aims to analyse the literature on capital structure theories for the last 21 years to identify the existing gaps and themes for prospective researchers in this domain.Design/methodology/approachA sample of 183 articles published from 1999 to 2019 in the Scopus database using “capital structure theory” and “leverage” as keywords was analysed on various basis. A citation analysis was also performed to recognize impactful authors and papers.FindingsThe findings revealed that though the capital structure research studies were highly focussed on developed economies, with time, research studies in developing markets are increasing. Further, the capital structure research studies were largely conducted by considering all the industries together, whereas the focus on a particular industrial sector was meagre. Almost all the studies were empirical, thus providing scope for primary research. Various forms of regression were popular econometric techniques used in this area of late. This review highlighted the dominance of trade-off theory to elucidate the capital structure of firms, irrespective of the status of the economy. The comprehensive review uncovered the existing gaps and identified major themes evolving in the capital structure domain.Originality/valueUnlike a traditional review paper, this study classifies sample articles based on several parameters and depicts a graphical presentation of the findings to cover research gaps, avenues, evolving themes, key aspects, impactful authors and their papers, etc. in the capital structure domain. It provides ready-made information available for prospective research studies in this field.

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