Should Leverage Models Employ Time Varying or Time Invariant Firm Factors? An Empirical Analysis of Indian Listed Firms

Abstract

This study provides a comprehensive analysis of capital structure stability over long horizons for firms listed in India. It covers a period of 28 years from 1992 to 2019, leading to 20,371 firm-year observations to determine the relative significance of cross-firm leverage variation and time-series leverage variation. It also identifies the circumstances and industries when each type of variation emerges stronger. The study employs simple econometric tools along with financial modelling techniques in SPSS and Microsoft Excel. It was found that corporate leverages are sticky and predictable in the short run. Also, with an increase in a firm’s age, leverage stability increases. This study contributes to the existing literature by empirically establishing that leverages can also be persistent at high levels and identifying industries that are persistent at low and high leverages. The results show that persistence at low leverage is a common phenomenon; however, a few industries such as textile, construction, and metals and mining are persistent in their capital structures even at higher levels of leverage.