Leverage and business groups: Evidence from Indian firms

The motivation of this paper is that information problems and other market imperfections, which explain the business group phenomenon of firm ownership structure in emerging markets, also underpin mainstream theories of firm leverage. We draw from elements of theories of business groups as well as capital structure theories to specify a generic model of capital structure, which is then estimated and tested on a sample of 1652 quoted non-financial firms in India, including group-affiliated and independent firms. It is found that the leverage decisions of group-affiliated firms are significantly different from those of non-affiliated firms, suggesting that the business group ownership structure creates virtual (or internal) capital markets. Further evidence indicates that group-affiliated firms enjoy exceptional access to government and foreign loans, as proposed by the market failure and policy distortion theories of business groups.