Does capital structure depend on group affiliation? An analysis of Indian firms

Does capital structure depend on group affiliation? An analysis of Indian firms

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Article ID: iaor2013424
Volume: 35
Issue: 1
Start Page Number: 110
End Page Number: 120
Publication Date: Jan 2013
Journal: Journal of Policy Modeling
Authors:
Keywords: India
Abstract:

This paper investigates the effect of group‐affiliation on Indian corporate firms’ capital structure, based on data on 875 Indian non‐financial firms for the period 2002–2010. The GMM turns out to be the most appropriate among the three alternative methods. Following our hypothesis, group‐affiliated firms are found to have lower leverage than the stand‐alone firms. Managers of group‐affiliated firms seem to prefer equity as high leverage increases its bankruptcy risk. Also, firms are forced to cut capital requirements and R&D investments in order to service debt payments, damaging their long‐run efficiency and competitive position. From our analysis the conclusion that follows for the policy makers is that although group‐affiliation is considered to be beneficial for emerging economies like India in some earlier studies (Khanna & Palepu, 2000a), they ignored other dimensions of firm performance such as optimization of capital structure.

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