Skip to main content
SpringerLink
Log in

Leverage adjustment analytics: effect of Covid-19 crisis on financial adjustments of Indian firms

  • Published:
Journal of Economics and Finance Aims and scope Submit manuscript

Abstract

The corporate firms are affected by the impact of Covid-19 crisis on business activities, cash flow, and firm leverage. It is required to analyze the Speed of Adjustment (SoA) through which firms adjust their leverage toward target during Covid-19. We conduct leverage adjustment analytics by estimating the partial adjustment model, which empirically analyzes the effect of Covid-19 crisis on leverage adjustment. To analyse SoA for book and market leverage of firms, we applied the well-known partial adjustment model. We constructed three research hypotheses and models as following. First, we analyzed the SoA for the Pre-Covid, Covid-19, and Post-Covid periods. Second, we analyzed the SoA for financially flexible and constrained firms during the Covid-19 crisis. Third, we evaluated the effect of three Covid waves on the leverage adjustment. We found three types of empirical evidence on 611 Indian firms to validate three proposed hypotheses and models. First, the SoA is faster during the Covid-19 crisis than Pre-Covid for Indian firms. During Covid-19 period, the SoA for (book and market) leverage per quarter is found to be (5.43% and 8.64%), which is higher than the Pre-Covid period (3.86% and 4.29%). The Post-Covid period recorded a higher SoA for book leverage (8.18%) and lower for market leverage (7.57%). Second, during Covid-19 period, the financially flexible firms had a faster SoA than the constrained firms. Third, Covid waves have positive and significant effects on the leverage adjustment of Indian firms. The robustness test confirms our findings that corporate firms had increased SoA during the Covid-19 crisis, and financially-flexible firms adjusted their leverage more rapidly than constrained firms.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6

Similar content being viewed by others

Data Availibility Statement

The datasets generated during and/or analyzed during the current study are available from the corresponding author upon reasonable request.

References

  • Abraham F, Cortina Lorente JJ, Schmukler SL (2020) Growth of global corporate debt: Main facts and policy challenges. World Bank Policy Res Working Pap (9394)

  • Acharya VV, Steffen S (2020) The risk of being a fallen angel and the corporate dash for cash in the midst of covid. Rev Corp Financ Stud 9(3):430–471

    Article  Google Scholar 

  • Ahmed F, Syed AA, Kamal MA, de las Nieves López-García M, Ramos-Requena JP, Gupta S (2021) Assessing the impact of COVID-19 pandemic on the stock and commodity markets performance and sustainability: A comparative analysis of south asian countries. Sustainability 13(10):5669

  • Akhtaruzzaman M, Boubaker S, Sensoy A (2021) Financial contagion during covid-19 crisis. Financ Res Lett 38:101604

    Article  PubMed  Google Scholar 

  • Anand N (2014) An overview of Indian economy (1991–2013). IOSR J Econ Financ 3(3):19–24

    Article  Google Scholar 

  • Arellano M, Bond S (1991) Some tests of specification for panel data: Monte carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277–297

    Article  Google Scholar 

  • Arslan-Ayaydin Ö, Florackis C, Ozkan A (2014) Financial flexibility, corporate investment and performance: Evidence from financial crises. Rev Quant Finan Acc 42:211–250

    Article  Google Scholar 

  • Bajaj Y, Kashiramka S, Singh S (2020) Capital structure dynamics: China and India (chIndia) perspective. Eur Bus Rev 32(5):845–868

    Article  Google Scholar 

  • Bajaj Y, Kashiramka S, Singh S (2021) Economic policy uncertainty and leverage dynamics: Evidence from an emerging economy. Int Rev Fin Anal 77:101836

    Article  Google Scholar 

  • Baker M, Wurgler J (2002) Market timing and capital structure. J Fin 57(1):1–32

    Article  Google Scholar 

  • Baker SR, Bloom N, Davis SJ (2016) Measuring economic policy uncertainty. Q J Econ 131(4):1593–1636

    Article  Google Scholar 

  • Baker SR, Bloom N, Davis SJ, Kost K, Sammon M, Viratyosin T (2020) The unprecedented stock market reaction to covid-19. Rev Asset Pricing Stud 10(4):742–758

    Article  Google Scholar 

  • Barry JW, Campello M, Graham JR, Ma Y (2022) Corporate flexibility in a time of crisis. J Financ Econ 144(3):780–806

    Article  Google Scholar 

  • Barucci E, Del Viva L (2013) Dynamic capital structure and the contingent capital option. Ann Finance 9(3):337–364

    Article  MathSciNet  Google Scholar 

  • BIS (2020) Bank for International Settlements (BIS) Statistics. Online

  • Bora D, Basistha D (2021) The outbreak of covid-19 pandemic and its impact on stock market volatility: Evidence from a worst-affected economy. J Public Aff 21(4):e2623

    Article  PubMed  PubMed Central  Google Scholar 

  • Brunnermeier M, Krishnamurthy A (2020) The macroeconomics of corporate debt. Rev Corp Fin Stud 9(3):656–665

    Google Scholar 

  • BSE Sensex (2020) S &P Bombay Stock Exchange Limited India. Online

  • Chakraborty I (2020) Debt financing and market concentration in an emerging economy: Firm-level evidence from India. Econ Chang Restruct 53(3):451–474

    Article  Google Scholar 

  • Chow YP, Muhammad J, Bany-Ariffin AN, Cheng FF (2018) Macroeconomic uncertainty, corporate governance and corporate capital structure. Int J Manag Fin 14(3):301–321

    Google Scholar 

  • Cook DO, Tang T (2010) Macroeconomic conditions and capital structure adjustment speed. J Corp Fin 16(1):73–87

    Article  Google Scholar 

  • D’Amato A (2019) How did the global financial crisis impact the determinants of SMEs’ capital structure? Int J Glob Small Bus 10(3):210–232

    Article  Google Scholar 

  • Dang VA, Kim M, Shin Y (2014) Asymmetric adjustment toward optimal capital structure: Evidence from a crisis. Int Rev Fin Anal 33:226–242

    Article  Google Scholar 

  • Danso A, Lartey TA, Gyimah D, Adu-Ameyaw E (2021) Leverage and performance: do size and crisis matter?. Manag Financ 47(5):635–655

  • Daskalakis N, Balios D, Dalla V (2017) The behaviour of SMEs’ capital structure determinants in different macroeconomic states. J Corp Fin 46:248–260

    Article  Google Scholar 

  • Demirgüç-Kunt A, Peria MSM, Tressel T (2020) The global financial crisis and the capital structure of firms: Was the impact more severe among smes and non-listed firms? J Corp Fin 60:101514

    Article  Google Scholar 

  • Dissanaike G, Lambrecht BM, Saragga Seabra A (2001) Differentiating debt target from non-target firms: An empirical study on corporate capital structure. University of Cambridge, JIMS Working Paper (18)

  • Dufour D, Luu P, Teller P (2018) The influence of cash flow on the speed of adjustment to the optimal capital structure. Res Int Bus Fin 45:62–71

    Article  Google Scholar 

  • Ellul A, Erel I, Rajan U (2020) The covid-19 pandemic crisis and corporate finance. Rev Corp Financ Stud 9(3):421–429

    Article  PubMed Central  Google Scholar 

  • Fahlenbrach R, Rageth K, Stulz RM, Mueller H (2021) How valuable is financial flexibility when revenue stops? Evidence from the covid-19 crisis. Rev Financ Stud 34(11):5474–5521

    Article  Google Scholar 

  • Fama EF, French KR (2002) Testing trade-off and pecking order predictions about dividends and debt. Rev Financ Stud 15(1):1–33

    Article  Google Scholar 

  • Fischer EO, Heinkel R, Zechner J (1989) Dynamic capital structure choice: Theory and tests. J Financ 44(1):19–40

    Article  Google Scholar 

  • Flannery MJ, Rangan KP (2006) Partial adjustment toward target capital structures. J Financ Econ 79(3):469–506

    Article  Google Scholar 

  • Frank MZ, Goyal VK (2009) Capital structure decisions: which factors are reliably important? Financ Manag 38(1):1–37

    Article  Google Scholar 

  • Goodell JW (2020) Covid-19 and finance: Agendas for future research. Financ Res Lett 35:101512

    Article  PubMed  PubMed Central  Google Scholar 

  • Gourinchas PO (2023) International macroeconomics: from the great financial crisis to covid-19, and beyond. IMF Ger Econ Rev 71(1):1–34

    Article  Google Scholar 

  • Hall R, Feldstein M, Frankel J, Gordon R, Romer C, Romer D, Zarnowitz V (2003) The NBER’s Business-cycle dating procedure, National Bureau of Economic Research

  • Hansen LP, Singleton KJ (1982) Generalized instrumental variables estimation of nonlinear rational expectations models. Econometrica J Econ Soc 50(5):1269–1286

    Article  MathSciNet  Google Scholar 

  • Haque SM, Varghese MR (2021) The Covid-19 impact on corporate leverage and financial fragility. Int Monet Fund

  • Hovakimian A, Opler T, Titman S (2001) The debt-equity choice. J Financ Quant Anal 36(1):1–24

    Article  Google Scholar 

  • Huang H, Ye Y (2021) Rethinking capital structure decision and corporate social responsibility in response to covid-19. Account Financ 61(3):4757–4788

    Article  Google Scholar 

  • Im HJ, Kang Y, Shon J (2020) How does uncertainty influence target capital structure? J Corp Financ 64:101642

    Article  Google Scholar 

  • Jaworski J, Czerwonka L (2019) Meta-study on relationship between macroeconomic and institutional environment and internal determinants of enterprises’ capital structure. Economic research-Ekonomska istraživanja 32(1):2614–2637

    Article  Google Scholar 

  • Jiang Y, Xu Y, Li S (2022) How does monetary policy uncertainty influence firms’ dynamic adjustment of capital structure. Sage Open 12(1):21582440211068504

    Article  Google Scholar 

  • Korajczyk RA, Levy A (2003) Capital structure choice: macroeconomic conditions and financial constraints. J Financ Econ 68(1):75–109

    Article  Google Scholar 

  • Kraus A, Litzenberger RH (1973) A state-preference model of optimal financial leverage. J Financ 28(4):911–922

    Google Scholar 

  • Krieger K, Mauck N, Pruitt SW (2021) The impact of the covid-19 pandemic on dividends. Financ Res Lett 42:101910

    Article  PubMed  Google Scholar 

  • Kumar S, Colombage S, Rao P (2017) Research on capital structure determinants: a review and future directions. Int J Manag Financ 13(2):106–132

    Google Scholar 

  • Li X-M, Qiu M (2021) The joint effects of economic policy uncertainty and firm characteristics on capital structure: Evidence from us firms. J Int Money Financ 110:102279

    Article  Google Scholar 

  • Modigliani F, Miller MH (1963) Corporate income taxes and the cost of capital: a correction. Am Econ Rev 53(3):433–443

    Google Scholar 

  • Mukherjee S, Mahakud J (2010) Dynamic adjustment towards target capital structure: Evidence from Indian companies. J Adv Manag Res 7(2):250–266

    Article  Google Scholar 

  • Myers SC (1984) Capital structure puzzle. NBER Working Papers 1393, National Bureau of Economic Research, Inc

  • Palazzo B (2019) Cash flows risk, capital structure, and corporate bond yields. Ann Finance 15(3):401–420

    Article  MathSciNet  Google Scholar 

  • Panda AK, Nanda S, Hegde AA, Yadav AKK (2023) Receptivity of capital structure with financial flexibility: a study on manufacturing firms. Int J Financ Econ 28(2):1981–1993

    Article  Google Scholar 

  • Rajan RG, Zingales L (1995) What do we know about capital structure? some evidence from international data. J Financ 50(5):1421–1460

    Article  Google Scholar 

  • Rani N, Yadav SS, Tripathy N (2019) Capital structure dynamics of Indian corporates. J Adv Manag Res 17(2):212–225

    Article  Google Scholar 

  • RBI Database (2020) Reserve Bank of India: Database on Indian Economy (DBIE). Online

  • Roodman D (2009) How to do xtabond2: An introduction to difference and system gmm in stata. The Stata Journal 9(1):86–136

    Article  Google Scholar 

  • Rungcharoenkitkul P (2021) Macroeconomic effects of covid-19: A mid-term review. Pac Econ Rev 26(4):439–458

    Article  Google Scholar 

  • Saxena M, Bhattacharyya S (2022) Industry dynamics and capital structure choice: Evidence from Indian manufacturing firms. Manag Decis Econ 43(3):829–845

    Article  Google Scholar 

  • Sethi P, Chakrabarti D, Bhattacharjee S (2020) Globalization, financial development and economic growth: Perils on the environmental sustainability of an emerging economy. J Policy Model 42(3):520–535

    Article  Google Scholar 

  • Shahzad A, Azeem M, Nazir MS, Vo XV, Linh NT (2021) The determinants of capital structure: Evidence from SAARC countries. Int J Financ Econ 26(4):6471–6487

    Article  Google Scholar 

  • Sharma P, Leung TY, Kingshott RP, Davcik NS, Cardinali S (2020) Managing uncertainty during a global pandemic: An international business perspective. J Bus Res 116:188–192

    Article  PubMed  PubMed Central  Google Scholar 

  • Shyam-Sunder L, Myers SC (1999) Testing static tradeoff against pecking order models of capital structure. J Financ Econ 51(2):219–244

    Article  Google Scholar 

  • Titman S, Wessels R (1988) The determinants of capital structure choice. J Financ 43(1):1–19

    Article  Google Scholar 

  • Vo XV (2017) Determinants of capital structure in emerging markets: Evidence from vietnam. Res Int Bus Financ 40:105–113

    Article  Google Scholar 

  • Vo TA, Mazur M, Thai A (2022) The impact of covid-19 economic crisis on the speed of adjustment toward target leverage ratio: An international analysis. Financ Res Lett 45:102157

    Article  PubMed  Google Scholar 

  • Welch I (2004) Capital structure and stock returns. J Polit Econ 112(1):106–131

    Article  Google Scholar 

  • Zeitun R, Temimi A, Mimouni K (2017) Do financial crises alter the dynamics of corporate capital structure? evidence from GCC countries. Q Rev Econ Financ 63:21–33

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Management Studies, ABV-Indian Institute of Information Technology and Management, Gwalior, 474015, India

    Ravindra N. Shukla

  2. Department of Management Studies, ABV-Indian Institute of Information Technology and Management, Gwalior, 474015, India

    Vishal Vyas

  3. Department of Data Science and Intelligent Systems, Indian Institute of Information Technology, Dharwad, 580009, India

    Animesh Chaturvedi

Authors
  1. Ravindra N. Shukla
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Vishal Vyas
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Animesh Chaturvedi
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Ravindra N. Shukla.

Ethics declarations

Conflict of Interest statement

The author(s) certify that they have No Conflict of Interest in the subject matter or materials discussed in this manuscript. I/We certify that the article is the Authors’ original work. The article has not received prior publication and is not under consideration for publication elsewhere. On behalf of all Co-Authors, the corresponding Author shall bear full responsibility for the submission.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Shukla, R.N., Vyas, V. & Chaturvedi, A. Leverage adjustment analytics: effect of Covid-19 crisis on financial adjustments of Indian firms. J Econ Finan (2024). https://doi.org/10.1007/s12197-024-09659-w

Download citation

  • Accepted:

  • Published:

  • DOI: https://doi.org/10.1007/s12197-024-09659-w

Keywords

JEL Classification

Search

Navigation