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Business cycle effect on leverage: A study of Indian non-financial firms

Arpita Pattanaik () and Rajeswari Sengupta ()
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Arpita Pattanaik: 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: In this paper we analyse the effect of business cycle fluctuations on firms' capital structure using a large panel of non-financial firms in India. In particular, we explore the dynamics of firm leverage across business cycle expansions and recessions for financially constrained and unconstrained firms. We find that the leverage of unconstrained firms exhibits counter-cyclical dynamics. Leverage of financially constrained firms does not show any cyclical pattern. These results are robust across different empirical methods of estimation. A healthy financial system is one where all firms are able to access the external debt market especially in a downturn. Our analysis shows that in the Indian financial system, external capital goes only to a certain category of firms. This has important policy implications for further developing the domestic financial markets and institutions.

Keywords: Capital structure; Firm leverage; Financial constraints; Business cycle; Leverage determinants; Indian firms (search for similar items in EconPapers)
JEL-codes: E32 G32 G1 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2018-01
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-mac and nep-sbm
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