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Does debt diversification impact firm value? Evidence from India

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  • Jadiyappa, Nemiraja
  • Hickman, L. Emily
  • Jyothi, Pavana
  • Vunyale, Narender
  • Sireesha, Bhanu

Abstract

Corporate debt diversification (firms simultaneously utilizing multiple distinct debt sources) is a global phenomenon. However, how such financing affects firm value has not yet been examined. Using Indian firms, we investigate debt diversification’s impact on monitoring effectiveness, agency costs, and financial constraints – which can all affect market value. Results reveal a negative impact of debt diversification on firm value, particularly among group-affiliated firms. This negative impact is attributed to free riding among lenders: evidence suggests that increased agency costs resulting from inferior monitoring contributes to worse firm accounting performance. Further, debt diversification does not appear to reduce financial constraints.

Suggested Citation

  • Jadiyappa, Nemiraja & Hickman, L. Emily & Jyothi, Pavana & Vunyale, Narender & Sireesha, Bhanu, 2020. "Does debt diversification impact firm value? Evidence from India," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 362-377.
    • Handle: RePEc:eee:reveco:v:67:y:2020:i:c:p:362-377
    DOI: 10.1016/j.iref.2020.02.002
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    2. Azofra, Valentín & Rodríguez-Sanz, Juan Antonio & Velasco, Pilar, 2020. "The role of macroeconomic factors in the capital structure of European firms: How influential is bank debt?," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 494-514.

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    More about this item

    Keywords

    Debt diversification; Firm value; Agency costs; Corporate governance; Group-affiliated firms;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G2 - Financial Economics - - Financial Institutions and Services
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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