Promoter’s Shareholding, Financial Distress and Capital Structure Decisions: An Empirical Study of Indian Firms

Abstract

This paper examines the effect of promoter’s shareholding and the level of financial distress on capital structure of Indian firms. Using the annual financial data of 1,102 non-financial firms listed on the Bombay Stock Exchange (BSE) from 2007 to 2019 in a panel structure, our study employs dynamic panel data techniques for analysis. The main objective of this paper is to find out how the financially distressed Indian firms choose debt in their capital structure and the role of promoter’s shareholding in such choices. For this purpose, four groups of companies have been formed by combining various degrees of promoter’s shareholding and the level of financial distress measured through Altman’s Z-Score. Dummy variables were introduced to represent each group in the model. This paper uses industry leverage, net working capital to total assets ratio, growth opportunities (Market to book ratio), profitability, tangibility and size as the control variables in the final empirical model.
 The findings provide that financially distressed Indian firms maintain higher leverage ratio than a financially non-distressed firm irrespective of the degree of ownership concentration in the hands of promoters. Since majority of Indian firms are owned by business families, this finding is completely opposite to the risk aversion behaviour of family- owned firms as advocated in literature.