Debt and corporate governance in emerging economies: Evidence from India

Jayati Sarkar (jayati@igidr.ac.in) and Subrata Sarkar (ssarkar@igidr.ac.in)
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Jayati Sarkar: Indira Gandhi Institute of Development Research

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

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.

Keywords: Debt; ownership structure; corporate governance; institutional change (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2005-11
New Economics Papers: this item is included in nep-cwa, nep-fin and nep-fmk
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Debt and Corporate Governance in Emerging Economies - Evidence from India (2005)
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