Debt Strategy Trends of Emerging Market Firms: Evidence from India

Debt Strategy Trends of Emerging Market Firms: Evidence from India

B. Rajesh Kumar, K.S. Sujit
Copyright: © 2017 |Pages: 16
DOI: 10.4018/IJSDS.2017100104
OnDemand:
(Individual Articles)
Available
$37.50
Current Special Offers
No Current Special Offers
TOTAL SAVINGS: $37.50

Abstract

Different industry sectors have high degree of variation with respect to financial leverage. The excessive use of financial leverage by firms had played a paramount role in the 2008 financial crisis. This study examines the average debt intensity of different industrial sectors during different time period. The study was based on a sample of approximately 20,000 companies representing 19 different industry sectors. The study explores whether there exist persistent differences in leverage ratios across different industry sectors in India. The study examines whether the leverage measures of the Indian firms have changed during different period of analysis. The study also examines the determinants of an optimal capital structure. Electricity sector is the most debt intensive sector among the different industry sectors. Communication, construction and real estate sectors were the next debt intensive sectors among the Indian industrial sectors. The average debt equity ratio of all the industry sectors was 16.57 reflecting the high debt intensity characteristics of Indian Industry. The mean debt equity ratio ranged from 1.45 (Machinery & Transport) to 85.64(Electricity) during the period 2005-2016. The average return on capital employed was negative for all the sectors during the period 2000-2016 except for electricity sector. The average leverage of 10 industry sectors increased in the period 2010-2016 compared to the period 2000-2009. The study document statistically significant variation in mean leverage ratio for industry sectors like communication, construction and real estate, electricity and miscellaneous manufacturing. The most leverage intensive sector construction and real estate sector was the only sector with positive average return on capital and had highest cash flow intensity during the period 2010-2016. Regression results finds statistically significant negative relationship between profitability and leverage. Less profitable firms tend to use more financial leverage. Firms that have more profits tend to have lower leverage. This result is in line with pecking order theory. Some evidence suggest that debt ratio is inversely related to the costs of financial distress. Firms with higher discretionary expenditures tend to have higher cash flows and hence lower costs of bankruptcy. Textile, metal, financial services, electricity and consumer goods are highly debt intensive industries.
Article Preview
Top

3. Review Of Literature

Schwartz and Aronson (1967) and Scott (1972) finds persistent difference across industries with respect to leverage ratios. Contrary findings are reported by Remmers et. al (1974), Ferri and Jones (1979) and Chaplinsky (1983).

Complete Article List

Search this Journal:
Reset
Volume 15: 1 Issue (2024): Forthcoming, Available for Pre-Order
Volume 14: 1 Issue (2023)
Volume 13: 4 Issues (2022): 1 Released, 3 Forthcoming
Volume 12: 3 Issues (2021)
Volume 11: 4 Issues (2020)
Volume 10: 4 Issues (2019)
Volume 9: 4 Issues (2018)
Volume 8: 4 Issues (2017)
Volume 7: 4 Issues (2016)
Volume 6: 4 Issues (2015)
Volume 5: 4 Issues (2014)
Volume 4: 4 Issues (2013)
Volume 3: 4 Issues (2012)
Volume 2: 4 Issues (2011)
Volume 1: 4 Issues (2010)
View Complete Journal Contents Listing