Impact of Business Group Affiliation on Capital Structure Adjustment Speed: Evidence from Indian Manufacturing Sector

Abstract

Firms’ capital structure dynamics and ownership structure are two extensively studied subjects of research in corporate finance in recent years. This study combines these two branches of research and examines the impact of firms’ ownership structure on capital structure dynamics. More specifically, it examines the asymmetry in adjustment speed between group and stand-alone firms. The study uses data of 1,415 listed Indian manufacturing firms over the period of 2005–2013 (9 years) from ‘Capitaline Plus’ database. It specifies a partial adjustment model and uses the generalized method of moments (GMM) technique to estimate the adjustment speed. The results show that Indian manufacturing firms close about 30 percent of their leverage gap every year. For group firms, the annual speed of adjustment is about 20–29 percent whereas for stand-alone firms, it is about 38–41 percent. Lesser potential benefits or higher costs of adjustments may be responsible for slower adjustment speed of group firms than their stand-alone counterparts.