Open Access Subscription Access
Open Access Subscription Access
Effect of Leverage and Adjustment Costs on Corporate Performance
The leverage ratio of Indian companies has increased significantly due to easy availability of various means of finance in the globalization period. In this context, our purpose is to find out the impact of leverage and adjustment costs on performance of the companies. The dynamic panel data model is estimated by Generalized Method of Moments (GMM) method that yield consistent parameter estimates. We have found that the adjustment speed of the various corporate performance measures has been varied between 24-58 percent and leverage has the negative impact on performance. Other control variables like size of the firm, tangibility, short-term liabilities and time dummy have also significant impact on various corporate performance measures. The paper has practical implications for managers, investors and policy makers to take cost effective financing and investment decisions in the rising interest rate regime, and developing the collateralized borrowing market in India.
Leverage, Corporate Performance, Dynamic Panel Data, Generalized Method of Moments, Economic Value Added, Partial Adjustment
- Arellano, M. and Bond, S. (1991), Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations, The Review of Economics Studies, 58: 277-297.
- Blundell, R., Bond, S., Devereux, M. and Schiantarelli, F. (1992), Investment and Tobins Q: Evidence from Company Panel Data, Journal of Econometrics, 51: 233-257.
- Blundell, R. and Bond, S. (1998), Initial Conditions and Moment Restrictions in Dynamic Panel Data Models, Journal of Econometrics, 87: 115-143.
- Bond, S. (2002), Dynamic Panel Data Models: A Guide to Micro Data Method and Practice, Portuguese Economic Journal, 1: 141- 162.
- Hsiao, C. (1985), Benefits and Limitations of Panel Data, Econometric Reviews, 4: 121-174.
- Jensen, M. (1986), Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers, American Economic Association Papers and Proceedings, 76: 323-329.
- Jensen, M. and Meckling, W. (1976), Theory of the Firm: Managerial Behavior, Agency Costs, and Capital Structure, Journal of Financial Economics, 76: 323-339.
- Kinsman, M. and Newman, J. (1999), Debt Level and Corporate performance: An Empirical Analysis, Proceedings of the 28th Annual Meeting of the Western Decision Sciences Institute, April 6-10, Puerto Vallarta, Mexico.
- Majumdar, S. and Chhibber, P. (1999), Capital Structure and Performance: Evidence from a Transition Economy on an Aspect of Corporate Governance, Public Choice, 98: 287-305
- Modigliani, F. and Miller, M. (1958), The Costs of Capital, Corporate Finance, and the Theory of Investment, American Economic Review, 48: 433-443.
- Myers, S. (1977), Determinants of Corporate Borrowing, Journal of Financial Economics, 5: 147- 175.
- Nickell, S., Nicolitsas, D. and Dryden, N. (1997), What Makes Firms Perform Well?, European Economic Review, 41: 783-796.
- Nickell, S., Nicolitsas, D. (1999), How Does Financial Pressure Affect Firms?, European Economic Review, 43: 1435-1456.
- Pushner, G. (1995), Equity Ownership Structure, Leverage and Productivity: Empirical Evidence from Japan, Journal of Pacific- Basin Finance Journal, 3: 241-255.
- Sargan, J. (1958), The Estimation of Economic Relationships Using Instrumental Variables. Econometrica, 26: 393-415.
- Weill, L. (2008), Leverage and Corporate Performance: Does Institutional Environment matter?, Small Business Economics, 30: 251- 265
Abstract Views: 155
PDF Views: 3