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What determines firms’ zero-leverage policy in India?

Biswajit Ghose (Department of Commerce, North-Eastern Hill University, Shillong, India)
Kailash Chandra Kabra (Department of Commerce, North-Eastern Hill University, Shillong, India)

Managerial Finance

ISSN: 0307-4358

Article publication date: 5 December 2016

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Abstract

Purpose

This paper studies the relationship between characteristics of firms’ and their propensity to maintain zero-leverage (ZL). Its second objective is to examine the impact of macroeconomic conditions on firms’ ZL policy. Finally, the purpose of this paper is to explore the underlying motives behind eschewing debt for constrained and unconstrained firms.

Design/methodology/approach

The paper uses data of 2001 non-financial and non-utility listed Indian firms over a period of 2005-2013 from Capitaline database. Size quintiles and dividend payment status have been used to differentiate between constrained and unconstrained firms. It uses t-test and logistic regression to draw inferences.

Findings

In general, firms pursuing ZL policy are financially constrained. However, there is a sub-section of ZL firms found unconstrained with high profitability. They appear to be “self-sufficient” to meet their financing requirements. Finally, macroeconomic conditions are counter cyclically related to firms’ ZL policy.

Research limitations/implications

The impact of corporate governance practices on firms’ ZL policy could not be examined due to data inadequacy. However, financial constraints and the presence of ZL firms come out as important factors to be paid special attention for future empirical works on capital structure.

Practical implications

The findings can be useful for financial managers in designing capital structure on the basis of their financial position.

Originality/value

Previous studies on ZL phenomenon are based on developed countries. The findings of previous studies conducted for developed countries get revalidated for the first time in the context of an emerging economy like India.

Keywords

Citation

Ghose, B. and Kabra, K.C. (2016), "What determines firms’ zero-leverage policy in India?", Managerial Finance, Vol. 42 No. 12, pp. 1138-1158. https://doi.org/10.1108/MF-01-2016-0029

Publisher

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Emerald Group Publishing Limited

Copyright © 2016, Emerald Group Publishing Limited

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