Debt, Where Is Thy Sting-Leverage and Corporate Performance

This paper examines the relationship between the debt-equity ratio and performance for a large sample of Indian firms. Extant theory posits a positive relationship between leverage and economic performance and this relationship is found to be valid in western economies. Analysis of data for a very large and representative sample of Indian firms, however, reveals the relationship for these firms to be significantly negative. The structure of capital markets in India, where both short-term and long-term lending institutions are predominantly government- owned, is postulated to account for the finding of this relationship, and it is shown that corporate governance mechanisms which work in the west will not work in the Indian context unless the supply of loan capital is privatised.