Does the Structure of Debt Affect the Output and Investment Strategies of the Firm?

Abstract

The paper examines the impact of total debts, short-term debts and long-term debts on the output, gross investments and technology-upgrading strategies of the firms in certain oligopolistic industries in India. We first develop a simple theoretical model to motivate the analysis. The empirical analysis shows that debt as a whole may have a negative impact on the choice of output and investment levels of the firms. However, the short-term debts make firms behave in a conservative fashion while the long-term debts make firms behave more aggressively in this respect. Debt, irrespective of its structure, forces the firms to upgrade their technology. Total debt has a negative impact on profitability, however, firms with higher long-term debts have higher profitability.JEL Classifications: L13, L60, D43, G32.