Agency theory, capital structure and firm performance: some Indian evidence

Abstract

Purpose – Based on the agency theory, the purpose of this paper is to empirically investigate the impact of capital structure choice on firm performance in India as one of the emerging economies. Design/methodology/approach – Fixed effect panel regression model is used to analyse ten years of data (2003-2012) on the sample units, to find the relation between leverage and firm performance after controlling for factors such as size, age, tangibility, growth, liquidity and advertising. Findings – Empirical results suggest that leverage has a negative influence on financial performance of Indian firms, which is in contrast with the assumptions of agency theory as commonly received and accepted in other developed as well as emerging economies. Consequently, postulates of agency theory have to be seen with different perspective in India given the underdeveloped nature of bond markets and dominance of state-owned banks in lending to corporate sector. Practical implications – The findings of the paper will enable the practitioners and analysts to understand as to why, in the bank-dominated debt financing system in India, leverage is negatively associated with firm performance. Originality/value – The results of the study enrich the literature on capital structure and agency costs issues in several ways.

Debt Capital and Financial Performance: A Comparative Analysis of South African and Sri Lankan Listed Companies

“…In support of Kakani et al's (2001) exploratory study, Dawar (2014) used the fixed effect panel regression model to find the relationship between leverage and firm performance after controlling for factors such as size, age, tangibility, growth, liquidity and advertising. The results suggested that leverage has a negative influence on financial performance of Indian firms, which is in contrast with the assumptions of agency theory.…”

“…The other unique factor is that most previous researchers (e.g., Goddard et al, 2005;Campello, 2006;David &Olorunfemi, 2010;Salim and Yadav, 2012;Sadeghian et al, 2012;Dawar, 2014;Abeywardhana, 2015;Yazdanfar and Öhman, 2015, etc. ) have conducted their researches on all non-financial institutions industries (listed or non-listed) together in one study, while this study seeks to research only about the wholesale and retail sector (industry) due to the little amount of research conducted, as well as the negative relationships found by the few researchers on the impact of capital structure on firm performances in this particular industry (Gleason et al, 2000;Yazdanfar and Öhman, 2015).…”

“…The results suggested that leverage has a negative influence on financial performance of Indian firms, which is in contrast with the assumptions of agency theory. Dawar, (2014) incorporated sectoral analysis to explore whether relationship is any different given the specific attributes particular to an industry. This support of what the previous authors, ( Williams and Goodman, 1971;Gupta and Huefner, 1972;Bowen et al, 1982;Mensah, 1984), said when it was suggested that applying the same variables across different sector produces overly general models that overlook the specific attributes of the sectors.…”

“…This research was inspired by contradicting findings from different researchers in different industries. It is also in response to Dawar (2014) which suggested that future researchers should incorporate sectoral analysis so as to explore whether relationship is any different given the specific attributes particular to an industry. Gleason et al (2000) also stated that 'Selecting all firms from one industry ameliorates problems associated with analysis of firms from different industries.…”

Capital Structure Influence on Construction Firm Performance

“…As such various studies were conducted to examine the effect of capital structure decision and firm performance (Adami, Gough, Muradoğlu, & Sivaprasad, 2013;Collins, Filibus, & Clement, 2012;David & Olorunfemi, 2010;Dawar, 2014;Hasan, Ahsan, Rahaman, & Alam, 2014;John, 2013;Khan, 2012). There are numerous research conducted to examine the relationship between capital structure and firm performance in developing countries such as Nigeria (Akeem, K, Kiyanjui, & Kayode, 2014;Collins et al, 2012;David & Olorunfemi, 2010), India (Chisti, Ali, & Sangmi, 2013;Dawar, 2014), Bangladesh (Hasan et al, 2014) and Jordan (Zeitun & Tian, 2007). As for example research conducted by Zeitun and Tian (2007) in Jordan which aim to investigate and examine the effect of capital structure on corporate performance using a panel data sample representing of 167 Jordanian companies during [1989][1990][1991][1992][1993][1994][1995][1996][1997][1998][1999][2000][2001][2002][2003].…”