There have been numerous empirical researches on various factors determining the relation between capital structure and firm value. The debate on the impact of capital structure variables on firm value is ongoing in the field of corporate finance. It still hasn’t come to a conclusive result and remains a controversial issue. Few capital structure theories such as the theories of trade off, pecking order and market timing have been extensively studied and tested empirically in the literature, but have given mixed results. Therefore, there is no unanimous view on the relevance of capital structure theories in general and especially on hospitality industries in particular. In lieu of this, the study aims to understand the role of firm quality and capital structure in determining the firm value in the hospitality sector in a developing country context. It analyzes selected hotel and tourism companies listed on Bombay stock exchange (BSE) in India to establish relationship between firm value and firm quality.

Our motivation to study the hospitality sector is due to many reasons. Firstly, due to unique characteristics of the hospitality sector, it constantly needs to innovate based on need of the hour. It focuses on creating a home away from home for travelers. Hence, it is always a great challenge for hotels to retain customers. Moreover, this industry is highly sensitive to macroeconomic cycles. Secondly, the slowdown in global economy has hit the Indian hotel industry which has been facing a slump for over five years now. As per the recent report in 2014 by the Federation of Hotels and Restaurant association of India (FHRAI), the occupancy rates in the hotel space have been stagnant since the past two years. A recent study by Varuni & Sathyanarayanan [1] mentioned how the global slowdown impacted both business and leisure travel which have led to a slump in this industry. Thirdly, the hospitality sector is constrained with funding issues with not so friendly lending policies by Indian banks. A report by HVS Global hospitality services from Thadani & Mobar [2] , analyzed the critical challenges faced by Indian hotel industry in 2013 highlighting a plethora of issues impacting this sector adversely. Fourthly, most of the empirical work on understanding determinants of capital structure in Indian context is limited to the manufacturing sector. The studies in developing countries are less in comparison to developed companies and more sparse in services sector.

The importance of the hospitality sector cannot be underestimated in India. With the first hotel established in India in 1903 (branded as the Taj Hotels by the founder of Indian conglomerate Tata group), the Indian hotel industry now is expected to generate almost 13.45 million jobs, accounting for almost 9% of total employment opportunities. The sector is among the top 10 sectors in India attracting foreign direct investments (FDI) as per the department of industrial policy and promotion (DIPP). Approximately USD 9.23 billion as FDI has been invested in this sector within the year 2000-2016 as mentioned in the report by IBEF [3] .

The results of the study are novel in many ways. Firstly, hardly any studies have seen done in the services sector to understand the determinants of firm value with respect to firm attributes, firm quality and its capital structure. The study has examined the impact of firm leverage, firm quality, firm attributes (such as size, tangibility, profitability, asset growth) along with macro variables on firm value. With respect to firm leverage, past studies have given mixed results. This has been mostly dependent upon the nature of the industry being examined. Firm quality and firm attributes have shown positive relationship with firm value. Our results have given interesting insights for disproving the theory of capital structure irrelevance. While the market equity value of the firm showed a negative relation with leverage, firm value showed a positive relation. Firm quality, firm size and liquidity also exhibited a significant positive relation with firm value.

This study contributes to the literature by examining capital structure and firm quality determinants to provide empirical support to capital structure theories in a specific industry, the hospitality sector in Indian context. Moreover, this is among the first study which analyzes relation between firm value and capital structure over a large time frame of 15 years for Indian hotel companies. This study will also help various stakeholders such as; hotel owners, government and investors to understand the relation between capital structure determinants, firm quality and firm value for hotel companies. Analyzing the impact of firm quality on firm value will enable management to reexamine their financial performance along with assisting in identifying which factors impact their firm value. It will also enable hotel owners to improve their capital structure decisions. For investors it will help them in better identification of firms for investments. For regulators it will enable them to identify areas to come up with friendly policies for hotel industry.

The rest of the study proceeds as follows: Section II discusses the literature review and prior work in empirical tests on firm value and capital structure theories leading to model specification. Section III presents the methodology followed. Section IV explains the results and Section V offers concluding remarks of the study.

Modigliani and Miller [4] stated that market value of a firm does not depends upon its capital structure and if firms do not provide the required returns, then individuals can get their desired returns by creating synthetic portfolios. Many scholars have found the theory of capital structure irrelevance by Modigliani and Miller [4] to be objectionable and have constantly challenged it. Walter [5] argued that the famous separation analogy of splitting milk into cream and skim milk for debt and equity bearing the same cost as whole milk cannot be considered in a similar fashion when looking at splitting of operating income. It was shown that an optimal capital structure exists with a certain debt level where the marginal cost of raising additional debt should be greater than or equal to the average cost of capital as pointed out by Solomon [6] . Firm failures had always invited scholarly attention moving from firm quality assessment based on qualitative factors to financial ratio analysis. Till 1970s, two kinds of statistical models were used to predict bankruptcy. These were the univariate model developed by Beaver [7] and the multivariate discriminant analysis, called the Z score which became the best known predictor of bankruptcy and is most widely used till date with continuous score revision, developed by Altman [8] .

During 1980s the critique against capital structure irrelevance theory branched in two areas. One was trade off theory (TOT) and another one incorporated management behavioral models like signaling and market timing in capital structure. According to the TOT, an optimal capital structure can be determined by maintaining a balance between cost of financial distress and tax benefits of debt.

Many scholars challenged the theory of capital structure irrelevance by adding imperfections of bankruptcy costs. Warner [9] empirically proved that firms with very volatile earnings had less debt and more diversified firms had more debt due to different bankruptcy costs. Hence a firm should not borrow “as much as possible” and act rationally by matching asset maturities and debt. For a firm there are assets in place representing present value of earnings (which should be financed by debt) and assets for growth representing present value of growth opportunities (which should be financed more by equity). Myers [10] showed that large levels of debt can also lead to under investment., DeAngelo & Masulis [11] challenged the capital structure irrelevance theory by taking corporate tax shields as substitute of debt tax shields and showing that each firm has a unique optimal capital structure dependent on its industry.

A review on theory of capital structure by Raviv [12] showed that apart from TOT, capital structure theories diverged into two other dimensions of agency theory and asymmetric information arising due to conflict of interest in asset ownership. Tracing the developments in finance theory, Weston [13] mentioned that scholars have identified three root causes of agency problems which were due to shareholders gaining on expense of debtholders, managers or agents taking an undue advantage of firm perks with a fractional ownership and information asymmetry. The agency theory states that there does exist an optimal capital structure for a firm by a tradeoff between the agency cost of debt and the benefit from debt. Jensen & Meckling [14] used this explanation to justify why loan agreements have covenants to protect lenders from the risk of asset substitution by shareholders. The information asymmetry led to the development of pecking order theory by Myers [15] which resides on firm managers using private information to time issue of securities and having a preference first for internal funds, then debt and lastly equity. Hence use of debt, equity or retained earnings also gives a signal on firm operations and impact firm value.

Various studies have tried to find empirical evidence for these theories by using firm specific variables to determine their impact on firm value and capital structure. The literature has evolved in two areas. One analyzes the determinants of capital structure i.e. the factors affecting firm leverage. The other analyzes the impact of firm capital structure on firm market value. Moreover, studies have been done on both listed and non-listed firms. This study caters to the impact of firm capital structure and quality on firm market value by studying listed firms. Major studies have related firm value with capital structure variables like debt, equity, size, profitability, risk, tangibility and macro factors like inflation, growth etc. Some of the pioneering work in this area has been of Rajan and Zingales [16] ; Booth [17] . A detailed explanation of the variables examined in this study is given in section III.

In Indian context the empirical evidence of capital structure determinants has been done in a limited way and mostly restricted to manufacturing sector. Major works include those of Sarma and Rao [18] , Dhankar and Boora [19] , Bhaduri [20] and recent works by Mukherjee & Mahakud [21] and Chadha & Sharma [22] have given mixed results. Moreover, majority of these studies have attempted to establish the relation between firm capital structure and firm specific determinants. Impact of them on firm value is not explored much in Indian context. This study contributes to the existing literature by analyzing the impact of capital structure and firm specific variables on firm value of Indian hotel industry.

A conceptual framework of the linkages of firm attributes, firm quality and capital structure on firm value is given in Figure 1. The framework indicates the sign of relationship based on the trade of theory. It has been used to develop hypothesis for examining the relationships between the variables.

The next section discusses the variables used in depth along with the development of model equation for analysis.

The panel data is used on 22 Indian hotel companies which are listed on the BSE. The time period of analysis ranges from a period of 2001-15. The data is sourced from CMIE database. The database contains 37 listed companies under the hotels and restaurant industry group. A total of 22 firms were selected for the analysis. The basis of selection of firms was done subject to data availability and listing prior to 2000. A brief description of the 22 firms is given in the appendix of the study. The selection of firms is shown in Table 1.

A variety of capital structure determinants have been used in different studies depending upon the research objective and industry being analyzed. Empirical studies have shown the impact of firm specific factors on determination of capi-