Corporate borrowing and profitability in India
Article first published online: 25 MAY 2009
Copyright © 2009 John Wiley & Sons, Ltd.
Managerial and Decision Economics
Volume 31, Issue 1, pages 33–45, January 2010
How to Cite
Majumdar, S. and Sen, K. (2010), Corporate borrowing and profitability in India. Manage. Decis. Econ., 31: 33–45. doi: 10.1002/mde.1472
- Issue published online: 17 DEC 2009
- Article first published online: 25 MAY 2009
This paper examines effects of different types of corporate borrowing on firm profitability in India. We show that in contrast to the conventional thinking on the importance of monitored debt in determining firm performance, what matters more is arm's-length lending in the form of fixed deposits in influencing firm profitability. We argue that the strategic implications of fixed deposits can be mainly attributed to the fact that they are both unsecured and privately held, which make the creditors associated with this type of debt the most likely to monitor firms' performance. The results suggest that debt structure matters, and it is important to take into account institutional differences and the heterogeneity of debt in the analysis of capital structure on firm performance. Copyright © 2009 John Wiley & Sons, Ltd.