Promoter ownership and speed of adjustment toward the target capital structure

Using a large sample of more than 2900 Indian firms from 2004 to 2023, our study reveals a non-linear association between promoter ownership and the speed of adjustment (SOA) in leverage. Specifically, we find that at lower levels of promoter ownership, the adjustment to leverage targets is swifter, whereas at higher levels of promoter ownership, the adjustment slows down. This non-linear relationship is particularly pronounced among underleveraged firms, which encounter greater costs of adjustment stemming from heightened information asymmetry and agency problems between promoters and outside shareholders. To substantiate our findings, we use a DiD estimation to exploit a quasi-natural experiment on the plausibly exogenous variations in promoter ownership mandated by the SEBI regulation. We further show that the slower SOA in firms with higher promoter ownership translates into lesser firm value. Our results are robust to a battery of alternative specifications, endogeneity issues, and using various proxies for information asymmetry.