Debt, Industry Structure, and Market Valuation: Sector-Specific Evidence from India’s IT and Automobile Firms

Abstract

The relationship between capital structure and firm market valuation remains a central yet unresolved question in corporate finance, with outcomes shaped critically by industry-specific asset structures and financing environments. This study investigates how capital structure influences market valuations across two structurally divergent sectors in India, the asset-light information technology (IT) industry and the asset-intensive automobile industry, using balanced panel data for 14 firms in each sector over 2005–2024. Fixed effect and random effect panel regression models are employed to isolate the direct effect of leverage on earnings per share (EPS), with model selection determined by the Hausman specification test. Complementing these estimations, the Graphical Lasso is applied to recover a sparse conditional dependence network among key financial variables, an approach particularly suited to this research question, as capital structure, profitability, tangibility, and growth are jointly determined, rendering pairwise correlations insufficient for identifying genuine financial linkages. The findings establish that debt exerts a positive and statistically significant effect on market valuations in both sectors, but through distinct economic channels: moderate leverage amplifies profitable growth signals in IT firms, while tax shield benefits drive valuation in automobile firms, constrained by asset tangibility and debt-servicing thresholds. These results support trade-off theory in the automobile sector and pecking order logic in the IT sector, underscoring that sector-specific financing strategies yield superior valuation outcomes compared to universally applied capital structure prescriptions.