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The IUP Journal of Applied Finance
Firmsí Financing Decisions in Deficit and Surplus Situations: Survey-Based Evidence from India
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The aim of this paper is to investigate the financing decisions of Indian corporate managers in deficit and surplus situations. The study analyzes the survey results derived from questionnaires received from the companiesí Chief Financial Officers (CFOs)/Finance Managers/Directors Finance, using descriptive statistics. The survey findings indicate that a majority of the Indian companies prefer to adjust their capital when they face deficits or have surpluses. During deficiency, firmsí preference is to avoid future capital expenditures and issue of long-term debt to finance deficits. In contrast, companies having surpluses indicate their preference to (i) deposit surplus funds with banks for a short period; and (ii) utilize surpluses to redeem debt. On the aspect of choice of financing sources, the results are consistent with the pecking order hypothesis. Deficit firms have marked preference for long-term debt to finance deficits and surplus firms opt for short-term debt for future needs.

 
 
 

The financing decisions are of immense significance to a firm to make a choice between debt and equity in deficit or surplus situations. A firm either faces funds deficiency or surpluses availability (Myers, 2001). The decision of a manager varies when a firm faces deficit or has surpluses. The pecking order theory suggests that firms prefer internal to costly external sources in a hierarchy of internal funds, debt and equity.

Previous surveys of Chief Financial Officers (CFOs)/managers on the financing decisions have attempted to explain the preferences for pecking order or trade-off theory and factors affecting debt and equity decisions (Jain et al., 1995; Graham and Harvey, 2001; Bancel and Mittoo, 2004; Brounen et al., 2006; and Jain et al., 2013). Surveys in the existing literature with regard to firmsí financing decisions in separate situations of deficit and surplus remain unexplored (to the best of the authorsí knowledge).

 
 
 

Applied Finance Journal, Firmsí Financing Decisions, Deficit and Surplus Situations, Survey-Based Evidence