Abstract:-
This paper investigates the evolution of leverage ratio in Indian corporate firms over the 31-year period from 1991 to 2021 i.e. the entire post-reform period. We use kernel density estimation techniques to analyse the distribution of leverage across firms. We find that most of the estimated densities exhibit bimodal distribution while considering all firms. Two separate ‘clubs’ have also been observed in all categories of firms, viz., group-affiliated, stand-alone, good-performing, and bad-performing firms. There exists intra-distribution dynamics and persistence of leverage. To explain the reasons for formation of two “clubs”, we argue that although the stock market was flourishing in India during the post-reform period, small firms did not have much access to that market due to higher informational asymmetries between insiders in these firms and the capital markets. Moreover, we observe that firms with a greater percentage of fixed assets to total assets have higher leverage because fixed assets can be used as collateral. We also argue that monetary policy changes might have played some role in the formation of two “clubs” in the distribution of leverage in Indian corporate firms during the post-reform period. Thus, two “clubs” with high and low leverage co-existed in the Indian corporate firms in the post-reform period. Our findings also raise questions against the conventional wisdom that the leverage of business group firms is different from that of the stand-alone firms and that firms with high profitability should be less leveraged. Such observations are usually based on the conditional mean of leverage which is misleading. Our observations reveal that these average effects mask the heterogeneity in the distribution of leverage. These findings have several policy implications for the managers of the companies and the regulators of the Indian stock markets.