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Impact of size and earnings on speed of partial adjustment to target leverage: a study of Indian companies using two-step system GMM

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  • Pankaj Sinha

    (University of Delhi)

  • Sandeep Vodwal

    (University of Delhi)

Abstract

The current study examines the differential adjustment speed to target leverage based on size and profit for Indian non-financial firms, using the two-step system GMM methodology. The results rely on a panel data sample of 431 listed firms from 2002 to 2017. The findings advocate that the Indian firms are likely to achieve optimum capital structure and bridge the actual and target leverage gap at 41.3% per annum. Notably, the speed of partial adjustment to the target leverage is significantly impacted by the firm’s size and profit. Large and highly profitable firms tend to adjust their debt financing ratio at a higher speed (66.2%) in comparison to loss-making or low profit-making firms and small firms (58%). At the same time, small size and average profitable firms have the lowest (46.5%) rate of adjustment to the target capital structure. The findings indicate that recapitalization costs for Indian non-financial firms are lower, if they are closer to the target leverage.

Suggested Citation

  • Pankaj Sinha & Sandeep Vodwal, 2022. "Impact of size and earnings on speed of partial adjustment to target leverage: a study of Indian companies using two-step system GMM," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 13(2), pages 957-977, April.
    • Handle: RePEc:spr:ijsaem:v:13:y:2022:i:2:d:10.1007_s13198-021-01374-7
    DOI: 10.1007/s13198-021-01374-7
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