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The IUP Journal of Applied Finance
Indebtedness in Non-Group Affiliated Indian Manufacturing Firms: An Analysis of Borrowing Behavior
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This paper analyzes the pattern of indebtedness and the factors influencing the borrowing behavior of Indian manufacturing firms using a sample of listed stand-alone manufacturing firms covering the period 2008-2015. The findings reveal that borrowing is the most important source of finance, followed by current liabilities for the sampled firms. There is overwhelming evidence that access to bank credit is determined primarily by the collateral capacity of the firm. Another important finding of the study is the distribution of borrowed funds; over the entire period of the study, the same has got increasingly skewed in favor of fixed asset rich firms. With regard to the determinants of corporate borrowing, regression results suggest that asset tangibility, profitability and cash flow volatility are the major influencers of indebtedness; firm size favorably influences only bank borrowing, and firm uniqueness and growth opportunities have no significant influence on indebtedness. The availability of alternative tax shields significantly influences total borrowing of firms.

 
 
 

The borrowing behavior of firms has been the subject of intensive research ever since the celebrated Modigliani and Miller (1958) proposition on debt irrelevance was published. Since then, alternative theoretical models of capital structure have emerged which diverge from the assumption of perfect capital markets, the cornerstone of debt irrelevance propositions. Harris and Raviv (1991) categorize these models under four broad heads: the agency theoretic models, models based on asymmetric information, models based on corporate control consideration, and models based on product/input market interactions. Additionally, there are tax-based models (Bradley et al., 1984) and the market timing theory of capital structure (Baker and Wurgler, 2002). Over the same period, empirical evidence based on listed and unlisted firms from developed as well as emerging nations also emerged to validate (or otherwise) the tenability of alternative models in specific contexts. Empirical evidence also emerged in the Indian context, more so from the latter half of the 1990s (post the economic reform program of 1992) using samples of listed firms for the purpose of analysis and inference. However, the Indian business scenario, like other emerging markets, is characterized by the existence of large diversified business groups. Khanna and Palepu (2000) defined a business group as “a set of firms which though legally independent, are bound together by a constellation of formal and informal ties and are accustomed to taking coordinated action” and play an important role in providing the missing institutional support to group firms in emerging markets. Empirical studies on capital structure determinants in India have largely overlooked this issue while analyzing the pattern of borrowing in general or validating alternative theories in particular by including both stand-alone and group-affiliated firms in samples used for analysis. One possible reason behind this may be the overwhelming presence of business groups in the productive sector; a presence big enough to rule out the exclusion [for instance, of the 453 non-financial firms included in the two largest indexes (S&P BSE 500 and Nifty 500), 349 are affiliated to large business groups1]. Consequently, little is known about the financing practices of stand-alone firms in emerging markets. This paper aims to address this deficiency of existing empirical evidence by analyzing the financing pattern of a sample of listed stand-alone Indian manufacturing firms and their major source of finance for the period 2008-2015. Furthermore, the paper analyzes the distribution of bank credit among the sampled firms and the factors that determine indebtedness.

 
 
 

Applied Finance Journal,Pattern of Indebtedness and the factors, Borrowing behavior of Indian manufacturing firms , Sample of listed stand-alone manufacturing firms .