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: | Chakraborty Indrani |
Keywords: | India |
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.