Capital Structure, Group Affiliation and Financial Constraints: Indian Evidence

This study investigates the impact of business group affiliation on firms' debt ratio in India. It also examines if group affiliation has varied impact on debts with different maturity structure (i.e. long-term debt and short-term debt), and different ownership structure (i.e. private debt and public debt). In order to draw inferences, it uses panel fixed effect regression model on a dataset of 1,510 listed firms over 2005-2013. It finds that group affiliation has negative impact on firms' long-term debt, public debt and overall debt ratio. The study further finds that cost of borrowing is not the factor behind lower debt ratios for group firms. Rather, the findings indicate that group firms are concerned for financial flexibility to avoid under investment
problem in future as they have significantly higher growth opportunities than their stand-alone counterparts. Most importantly, group affiliation negatively affect debt financing only for constrained firms, but not for unconstrained firms.