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Does economic state matter for leverage adjustments? An India–China comparison

Author

Listed:
  • Yukti Bajaj
  • Smita Kashiramka
  • Shveta Singh

Abstract

We examine the impact of the economic state on capital structure dynamics of Indian and Chinese listed firms using a 10‐year sample period. The empirical analysis is based on the standard partial adjustment mechanism. The economic state (in the base model) is categorised into a good and bad state based on the gross domestic product growth rate. Using system generalised method of moments estimation, our findings suggest that the capital structure speed of adjustment is pro‐cyclical for Indian firms, i.e., they exhibit faster adjustments during a good state of the economy than the bad state. In contrast, the speed is countercyclical in the context of Chinese firms, i.e., they exhibit slower adjustments during a good state of the economy and vice versa. Furthermore, consistent with the existing literature, Indian firms do faster rebalancing than the Chinese ones. Our findings are robust across alternate measures of leverage as well as the economic state.

Suggested Citation

  • Yukti Bajaj & Smita Kashiramka & Shveta Singh, 2024. "Does economic state matter for leverage adjustments? An India–China comparison," The World Economy, Wiley Blackwell, vol. 47(2), pages 492-518, February.
  • Handle: RePEc:bla:worlde:v:47:y:2024:i:2:p:492-518
    DOI: 10.1111/twec.13413
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