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Debt financing and market concentration in an emerging economy: firm-level evidence from India

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Abstract

This study has empirically tested the relation between leverage and market concentration using a balanced panel data on 1469 firms over 26 manufacturing industries during 2001–2016 in the context of India. Our regression results indicate that competition has an overall negative effect on leverage. The negative effect of competition on leverage is intensified with larger firm size and larger growth opportunities. Finally, we examine whether the relationship between leverage and competition is non-monotonic. Our results show no important departure from linearity while using HHI but support the cubic relationship while using Tobin’s q. Different tests of robustness support our results.

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Notes

  1. As competition increases, the firm’s value-adding capabilities decrease, and hence, the value of Tobin’s q decreases. Thus, Tobin’s q is an outcome of the competitive process, and competition and Tobin’s q are inversely related.

  2. System GMM method gives the dynamic relationship between leverage and competition. System GMM has some advantages. In the case of panel data, the sample size becomes much larger than would be the case if just time-series or cross-sectional data were employed and so the degrees of freedom increase. Moreover, the estimates from panel data are more efficient than those from the pooled OLS, and hence the reliability of the regression coefficients increases (Baltagi 2005).

  3. Multicollinearity is a serious problem if the value of the variance inflation factor (VIF) is greater than 10 (Nachane 2006).

  4. To avoid the first-order serial correlation, we have used up to four lags of the dependent variable in the estimation.

  5. F values should be used to decide on the selection of the optimal model.

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Acknowledgements

I am grateful to the editor, Professor George Hondroyiannis, and two anonymous referees whose comments and suggestions helped improve the paper. I am thankful to the comments provided by the participants of the Conference on “Contemporary Issues in Development Economics” held at Jadavpur University during 21–22 December 2018 and also at the Seminar at the Institute of Development Studies, Kolkata, held on 18 January 2019. I am especially grateful for the helpful comments and suggestions by Professors Amiya Bagchi, Subhanil Choudhury, and Ranjanendra Narayan Nag. For technical help, I am indebted to Dr. Subrata Mukherjee and Dr. Jhuma Mukhopadhyay. All the remaining errors are mine.

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  1. Institute of Development Studies Kolkata, DD-27/D, Sector-I, Salt Lake City, Kolkata, 700064, India

    Indrani Chakraborty

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Chakraborty, I. Debt financing and market concentration in an emerging economy: firm-level evidence from India. Econ Change Restruct 53, 451–474 (2020). https://doi.org/10.1007/s10644-019-09256-6

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