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Debt and corporate governance in emerging economies: Evidence from India

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Author Info
Jayati Sarkar () (Indira Gandhi Institute of Development Research)
Subrata Sarkar () (Indira Gandhi Institute of Development ResearchIndira Gandhi Institute of Development Research)

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Abstract

We analyze the role of debt in corporate governance with respect to a large emerging economy, India, where debt has been an important source of external finance. First, we examine the extent to which debt acts as a disciplining device in those corporations where potential for over investment is present. We undertake a comparative evaluation of group-affiliated and non-affiliated companies to see if the governance role of debt is sensitive to ownership and control structures. Second, we examine the role of institutional change in strengthening the disciplining effect or mitigating the expropriating effect of debt. In doing so, we estimate, simultaneously, the relation between Tobin's Q and leverage using a large cross-section of listed manufacturing firms in India for three years, 1996, 2000, and 2003. Our analyses indicate that while in the early years of institutional change, debt did not have any disciplinary effect on either standalone or group affiliated firms, the disciplinary effect appeared in the later years as institutions become more market oriented. We also find limited evidence of debt being used as an expropriation mechanism in group firms that are more vulnerable to such expropriation. However, the disciplining effect of debt is found to persist even after controlling for such expropriation possibilities. In general, our results highlight the role of ownership structures and institutions in debt governance.

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Paper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2005-007.

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Length: 48 pages
Date of creation: Nov 2005
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Handle: RePEc:ind:igiwpp:2005-007

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Related research
Keywords: Debt; ownership structure; corporate governance; institutional change;

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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