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Impact of size and earnings on speed of partial adjustment to target leverage: a study of Indian companies using two-step system GMM

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Abstract

The current study examines the differential adjustment speed to target leverage based on size and profit for Indian non-financial firms, using the two-step system GMM methodology. The results rely on a panel data sample of 431 listed firms from 2002 to 2017. The findings advocate that the Indian firms are likely to achieve optimum capital structure and bridge the actual and target leverage gap at 41.3% per annum. Notably, the speed of partial adjustment to the target leverage is significantly impacted by the firm’s size and profit. Large and highly profitable firms tend to adjust their debt financing ratio at a higher speed (66.2%) in comparison to loss-making or low profit-making firms and small firms (58%). At the same time, small size and average profitable firms have the lowest (46.5%) rate of adjustment to the target capital structure. The findings indicate that recapitalization costs for Indian non-financial firms are lower, if they are closer to the target leverage.

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Notes

  1. See Appendix 1.

  2. Results of endogeneity are given in "Appendix 3".

  3. Results of one-step GMM are given in "Appendix 5".

  4. The results of Sargan’s Test and Arellano Bond Autocorrelation for lag (1) and lag (2) are provided in each table of estimation.

  5. Standard errors of estimates are reported in "Appendix 4".

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Acknowledgements

The research is based on the secondary data; the data sources and literature used in the study are properly mentioned and acknowledged.

Funding

No financial assistance for carrying out the above research study was received from any funding or Institutional agency.

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Authors and Affiliations

  1. Faculty of Management Studies (FMS), University of Delhi, Delhi, India

    Pankaj Sinha & Sandeep Vodwal

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  1. Pankaj Sinha
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  2. Sandeep Vodwal
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Correspondence to Pankaj Sinha.

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Appendices

Appendix 1

1.1 Descriptive Statistics based on the profit of the firms

See Table

Table 7 Descriptive Statistics for subsamples based on profitability
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7

1.2 Descriptive Statistics based on the size of the firms

See Table

Table 8 Descriptive Statistics for subsamples based on Size
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8

Appendix 2: Unit root test for stationarity

See Table

Table 9 Tests for Stationarity of Variables
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9

Appendix 3: Endogeneity test for GMM

See Tables

Table 10 Endogeneity test for BDFR
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10,

Table 11 Endogeneity test for MDFR
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11

Appendix 4: Comparison of standard error for dynamic trade-off theory

See Figs.

Fig. 2
figure 2

Comparison of Standard error for BDFR. The X-Axis represents variables namely1. Lag (1) of BDFR 2. Intercept, 3 NDTS,4 Tangibility, 5Profitability, 6 Size, 7 MTB, 8 Liquidity, 9 Volatility

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2,

Fig. 3
figure 3

Comparison of Standard error for MDFR. The X-Axis represents variables namely1. Lag (1) of MDFR 2. Intercept, 3 NDTS,4 Tangibility, 5Profitability, 6 Size, 7 MTB, 8 Liquidity, 9 Volatility

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3

Appendix 5: Results of pooled OLS, fixed effect model, differenced GMM model, and one step GMM

See Tables

Table 12 Estimation Results of Pooled OLS, Fixed Effect Model, Differenced GMM model, and Step GMM for BDFR
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12,

Table 13 Results of Pooled OLS, Fixed Effect Model, Differenced GMM model, and Step GMM for MDFR
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13

Appendix 6: Two-step system GMM results for size and profit BDFR

See Tables

Table 14 Two-step system GMM results of leverage and size of the firm for BDFR
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14,

Table 15 Two-step system GMM results of leverage and profit of the firm for BDFR
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15

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Sinha, P., Vodwal, S. Impact of size and earnings on speed of partial adjustment to target leverage: a study of Indian companies using two-step system GMM. Int J Syst Assur Eng Manag 13, 957–977 (2022). https://doi.org/10.1007/s13198-021-01374-7

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