Practices of Capital Structure, Ownership Concentration, Business Groups, and Corporate Performance: An Empirical Indian Evidence

Abstract

The main objective of the study is to examine the bi-directional effect of corporate performance spectrum on leverage dynamics, ownership concentration and business group affiliation using firm-specific and macroeconomic determinants of modern corporate finance theories. The empirical investigation considers an unbalanced panel of 638 non-financial firms listed in the BSE having a consistent financial track record during the period 2001-2016 envisaging 8,750 firm-year observations. Econometric techniques such as pooled ordinary least squares, simultaneous equation models and method of moments are implemented to establish the empirical tests of validity. The contributions are four-fold. Firstly, the effect of corporate performance spectrum on leverage dynamics document the presence of pecking-order theory as in the long-run firms are able to corroborate their effects of promoters’ shareholding with strictly exogenous regressors exhibiting identical effects. As a solution, 2SLS found market-to-book ratio and promoters’ shareholding as persistent instrumental variables that affect the corporate performance spectrum demonstrating a negative relation with leverage. Secondly, Indian firms do have target debt ratios and they adjust towards their target faster over time due to higher speed of adjustment as the half-life (in years) for total debt ratio (1.50), long-term debt ratio (1.82), short-term debt ratio (1.21), and market leverage (0.897) embellish attainable target points. This signifies long-term debt plays a vital role for Indian firms to meet their immediate investment opportunities, expansion, and diversification initiatives. Thirdly, the embodiments of ownership concentration postulates that as the line of control and ownership widens, controlling shareholders’ are at a better position to expropriate the firm’s financial resources and capabilities leading towards higher debt financing costs confine the roots of asset substitution and empire building. Finally, the spectrum of Business Houses corroborates the hidden grey earnings that minimizes the business costs in separating from opportunistic ones because of low enforcements pronounce notable insights. The benefits of group affiliation exceed the costs due to greater profitability targets achieved by the Business Houses in the post-reform period. The present research from an academic perspective, insights researchers to avoid methodological errors encountered during panel data estimation. In addition, this work will assist the financial analysts and managers to redefine their financing options bringing flexibility in changing dynamic scenarios.