The determinants of indebtedness of unlisted manufacturing firms in India : A panel data analysis

Purpose – The purpose of this paper is to examine the financing practices of unlisted manufacturing firms in India. In particular, the authors seek to explore how unlisted firms finance their growth and the extent to which they rely on external source of finance. Additionally, they explore whether the determinants of indebtedness that explain the borrowing behavior of listed Indian manufacturing firms are capable of explaining the financing decisions of unlisted firms as well. Design/methodology/approach – This paper uses panel data technique to determine the factors determining indebtedness of unlisted private manufacturing firms in India. Findings – Unlisted Indian manufacturing firms are largely dependent on bank borrowing for their growth, and access to finance is largely dependent on collateral capacity. The authors results show that the dominant firm factors affecting indebtedness of unlisted firms in India are asset tangibility, firm growth, size, profitability and firm age. Institutional and macroeconomic factors are also observed to be significant influencers of indebtedness. Research limitations/implications – Unavailability of financial information for the required number of years has resulted in certain firms and sectors of the economy not being included in the sample, and has, hence, affected sample size and representation. Similar problems have limited the period of the study to only four years. The study does not include unlisted services sector firms in the sample, and, hence, its findings cannot be generalized in the context of unlisted firms in India. Practical implications – There appears to be a strong case for both the policy-maker and financial economist to have a re-look at the financial constraints that unlisted firms face and redefine the role of the banks and financial institutions from being a passive provider of capital to that of a partner in ushering growth. Development of the financial intermediary sector in terms of its reach is expected to favorably influence growth of this sector. Originality/value – This paper provides empirical evidence on the alternative sources of raising outside capital and the factors determining the capital structure of unlisted manufacturing firms in India.