Promoter ownership and corporate leverage: Evidence from Indian firms

Abstract

A higher level of debt may help in aligning the interests of managers and shareholders; however, managers may underestimate the resulting costs of bankruptcy. Moreover, notwithstanding the tax and other benefits of debt, literature shows that firms may have more debt in their capital structure than is appropriate. A higher level of leverage becomes detrimental by increasing the chances of financial distress and, consequently, the chances of bankruptcy. This study investigated relationships between changes in promoter ownership and changes in leverage by taking a sample of 322 Indian service and manufacturing firms from Top 500 Companies listed on the Bombay Stock Exchange (BSE) for a period of five years (from 2010-2014). The results indicate that changes in promoter ownership play a role in lowering the leverage of Indian firms and, consequently, reducing the chances of bankruptcy. The findings of this study also indicate that changes in promoter ownership have more effect on the leverage of Indian service firms as compared to manufacturing firms. This study contributes to the literature on the factors that affect the leverage of the firm. The findings may be useful for financial managers, investors, financial management consultants, and other stakeholders