Financial Reforms and Corporate Financing Decisions

26 Pages Posted: 21 Apr 2013 Last revised: 15 May 2013

See all articles by Nemiraja Jadiyappa

Nemiraja Jadiyappa

The ICFAI Foundation for Higher Education (IFHE); IBS Hyderabad

V. N. Reddy

Institute of Chartered Financial Analysts of India (ICFAI) - The Icfai University (IFHE), Hyderabad

Date Written: April 21, 2013

Abstract

This study evaluates the impact of financial reforms on the corporate financing decisions of 23 Indian industries for the period 1989-2005. We argue that the impact will be industry-specific because the regulatory and financial framework in which industries operate differs across industries. This paper uses a financial reforms index that will allow a better understanding of the impact of gradual financial reforms on corporate financing decisions. Our findings, obtained using the pooled regression technique, indicate that majority of the industries experienced a negative impact of financial reforms on their leverage ratio; however, a significant difference is observed in the manner these industries reacted to counter this negative impact. The decline in leverage was offset by a corresponding increase in external equity proportion in case of a few industries and by an appreciation in internal capital proportion for the rest. Finally, our results do not support the hypothesis that interest rate is the main route through which the impact of macro-level financial reforms is experienced at the micro-level.

Keywords: financial deregulations, industry changes, financial reforms, financial liberalization, capital structure, corporate leverage, cost of debt

JEL Classification: G0, G3, G15, G20, G30

Suggested Citation

Jadiyappa, Nemiraja and Reddy, Vanga Nagi, Financial Reforms and Corporate Financing Decisions (April 21, 2013). Available at SSRN: https://ssrn.com/abstract=2254564 or http://dx.doi.org/10.2139/ssrn.2254564

Nemiraja Jadiyappa (Contact Author)

The ICFAI Foundation for Higher Education (IFHE) ( email )

Hyderabad
India

IBS Hyderabad ( email )

Plot No. 65, Nagarjuna Hills
Punjagutta
Hyderabad, 500082
India

Vanga Nagi Reddy

Institute of Chartered Financial Analysts of India (ICFAI) - The Icfai University (IFHE), Hyderabad ( email )

Donthanapally Shankarapalli Road
RAJAWALA ROAD
Hyderabad, RI Andhra Pradesh 501203
India

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