Dynamics of Corporate Reserve Debt Capacity

In explaining the dynamics of corporate Reserve Debt Capacity (RDC) at its utilization and creation of the high-risk and low-risk RDC by the high-value and low-value firms, the present paper seeks to put forward a new theory in literature. Utilizing the concept of suboptimality at firms’ pecking order track and that of ‘optimality’ at trade-off track, the theory recognizes the presence of ‘separating’ and ‘semi-separating’ equilibrium at the dynamic behaviors of their RDCs and their shifts from one track to the other. The theory conjectures that firms exploit their RDCs if the same are available or they recreate the same before utilization. The study also explores that the Indian firms issue secured as well as unsecured debts in utilization of RDC but these firms show greater reliance on the later sources of debts than the former. They behave differently on their inclusion in the high-value and low-value sub-samples. Both high-value and low-value firms utilize their internal and external equity for creating their low-risk and high-risk RDC where they show greater reliance on their new issues of equity than their uses of internal equity.