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Does capital structure depend on group affiliation? An analysis of Indian firms

  • Chakraborty, Indrani
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    This paper investigates the effect of group-affiliation on Indian corporate firms’ capital structure, based on data on 875 Indian non-financial firms for the period 2002–2010. The GMM turns out to be the most appropriate among the three alternative methods. Following our hypothesis, group-affiliated firms are found to have lower leverage than the stand-alone firms. Managers of group-affiliated firms seem to prefer equity as high leverage increases its bankruptcy risk. Also, firms are forced to cut capital requirements and R&D investments in order to service debt payments, damaging their long-run efficiency and competitive position. From our analysis the conclusion that follows for the policy makers is that although group-affiliation is considered to be beneficial for emerging economies like India in some earlier studies (Khanna & Palepu, 2000a), they ignored other dimensions of firm performance such as optimization of capital structure.

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    Article provided by Elsevier in its journal Journal of Policy Modeling.

    Volume (Year): 35 (2013)
    Issue (Month): 1 ()
    Pages: 110-120

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    Handle: RePEc:eee:jpolmo:v:35:y:2013:i:1:p:110-120
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505735

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