Leverage adjustment analytics: effect of Covid-19 crisis on financial adjustments of Indian firms

Ravindra N. Shukla (), Vishal Vyas () and Animesh Chaturvedi ()
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Ravindra N. Shukla: ABV-Indian Institute of Information Technology and Management
Vishal Vyas: ABV-Indian Institute of Information Technology and Management
Animesh Chaturvedi: Indian Institute of Information Technology

Journal of Economics and Finance, 2024, vol. 48, issue 2, No 12, 513-543

Abstract: Abstract The corporate firms are affected by the impact of Covid-19 crisis on business activities, cash flow, and firm leverage. It is required to analyze the Speed of Adjustment (SoA) through which firms adjust their leverage toward target during Covid-19. We conduct leverage adjustment analytics by estimating the partial adjustment model, which empirically analyzes the effect of Covid-19 crisis on leverage adjustment. To analyse SoA for book and market leverage of firms, we applied the well-known partial adjustment model. We constructed three research hypotheses and models as following. First, we analyzed the SoA for the Pre-Covid, Covid-19, and Post-Covid periods. Second, we analyzed the SoA for financially flexible and constrained firms during the Covid-19 crisis. Third, we evaluated the effect of three Covid waves on the leverage adjustment. We found three types of empirical evidence on 611 Indian firms to validate three proposed hypotheses and models. First, the SoA is faster during the Covid-19 crisis than Pre-Covid for Indian firms. During Covid-19 period, the SoA for (book and market) leverage per quarter is found to be (5.43% and 8.64%), which is higher than the Pre-Covid period (3.86% and 4.29%). The Post-Covid period recorded a higher SoA for book leverage (8.18%) and lower for market leverage (7.57%). Second, during Covid-19 period, the financially flexible firms had a faster SoA than the constrained firms. Third, Covid waves have positive and significant effects on the leverage adjustment of Indian firms. The robustness test confirms our findings that corporate firms had increased SoA during the Covid-19 crisis, and financially-flexible firms adjusted their leverage more rapidly than constrained firms.

Keywords: Covid-19 crisis; Firm leverage; Leverage adjustment; Financial crisis; Financial flexibility (search for similar items in EconPapers)
JEL-codes: G01 G12 G32 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s12197-024-09659-w

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