Corporate Governance Mechanisms and Firm Financing in India

This study investigates the firm financing patterns in India and the role of corporate governance mechanisms. We use firm-level time series data of nearly 2000 listed companies from 1994 through 2000, to analyze the firm’s corporate financing behavior in connection with its corporate governance arrangements, specially its shareholding pattern. Our results show that the capital structure of the firm is non-linearly linked to its corporate governance mechanisms (ownership structure). We find that firms with weaker corporate governance mechanisms (dispersed shareholding pattern, in particular measured by the entrenchment effects of group affiliation) tend to have a higher level of debt. Firms with higher foreign ownership or with low institutional ownership tend to have lower debt level. We do not find any significant relationship between ownership of directors and corporate with the firm financing in India. Overall, the findings presented in the paper provide evidence of definite role of corporate governance mechanisms in firm’s financing decisions in India.