Impact of Financial Crisis on Determinants of Capital Structure of Indian Non-financial Firms: Estimating Dynamic Panel Data Model using Two-Step System GMM

The sub-prime crisis of 2008 in the US shook the world markets through financial market integration, global trade links, and international banking diversification. The financial crisis led to changes in various policies both at macroeconomic and firm-level around the world. In this scenario, this study is an attempt to identify and uncover the changes in firm and institutional determinants of Debt Financing Ratio in India, before and after the crisis. Micro and macro panel data of 306 non-financial Indian listed firms were used for the period of 2002-2017 to study the factors affecting leverage. Two-step system GMM was employed to study the dynamics of leverage and its determinants during 2002-2008 (pre-crisis period) and 2009-2017 (post-crisis period). Pre and post-crisis analysis are undertaken by employing firm-specific factors represented by Non-debt tax shields, Asset Composition (tangibility), Size, Profitability, Growth Opportunity (Market to Book), and Liquidity in the firms and institutional factors represented by Economic Growth Rate and Inflation. Two models, with different measures of leverage as dependent variables, have been constructed to analyse the impact of the crisis. The results favoured that the Indian firms tend to adjust their capital structure to reach an optimum level of debt (Target Leverage). The study confirms that profitability, and size of the firm are robust determinants of leverage in both pre and post-crisis periods; tangibility is found to be insignificant in the pre-crisis period and statistically significant in the post-crisis period for both measures of leverage. Market to Book (MTB) ratio is consistently a non-significant factor for book measure of leverage, and it holds significant negative relation to the market measure of leverage. Based on the model employing the book measure of leverage as a dependent variable, the factors tangibility and liquidity show different behaviour in pre and post-crisis period. They are not found to be significant during the pre-crisis period ...