NO : WP-2018-001
AUTHOR : Arpita Pattanaik and Rajeswari Sengupta
TITLE : Business cycle effect on leverage: A study of Indian non-financial firms
In this paper we analyse the effect of business cycle fluctuations on firms’ capital structure using
a large panel of non-financial firms in India. In particular, we explore the dynamics of firm leverage
across business cycle expansions and recessions for financially constrained and unconstrained firms.
We find that the leverage of unconstrained firms exhibits counter-cyclical dynamics. Leverage of
financially constrained firms does not show any cyclical pattern. These results are robust across
different empirical methods of estimation. A healthy financial system is one where all firms are able
to access the external debt market especially in a downturn. Our analysis shows that in the Indian
financial system, external capital goes only to a certain category of firms. This has important policy
implications for further developing the domestic financial markets and institutions.
Keywords : Capital structure, Firm leverage, Financial constraints, Business cycle, Leverage determinants, Indian firms.
JEL Code : E32, G32, G1