The Determinants of Indebtedness in Unlisted Manufacturing Firms in India: A Panel Data Analysis

This research examined the borrowing behavior of unlisted private stand-alone manufacturing firms in India over the period 2006-07 to 2009-10 using balance sheet data. Findings suggest that total indebtedness is lower in unlisted manufacturing firms compared to their listed counterparts, and the difference is more pronounced in long-term borrowing ratio compared to short-term borrowing ratio. Unlisted manufacturing firms depend predominantly on banks for financing purposes in order to circumvent their inability to tap financial resources from capital markets, and they borrow predominantly on a secured basis. It seems collateralized borrowings enables these firms to overcome the problem of information opacity; asset tangibility enhances debt capacity in general and secured debt capacity in particular as the agency theory would suggest. This research does not provide any evidence to suggest that a close bank-firm relationship ease collateral requirements for unlisted firms, nor is there any evidence of the monitoring role of secured debt enhancing firm performance and hence profits. The ‘pecking order’ of financing as the asymmetric information theory of capital structure suggests, does not seem valid for unlisted firms; internal resource generating capacity only influences reliance on short-term funding, with no bearing on long term fund need.