Promoter ownership and corporate leverage: Evidence from Indian firms

Abstract

A higher level of debt may help in aligning the interests of managers and shareholders; however, managers may underestimate the resulting costs of bankruptcy. Moreover, notwithstanding the tax and other benefits of debt, literature shows that firms may have more debt in their capital structure than is appropriate. A higher level of leverage becomes detrimental by increasing the chances of financial distress and, consequently, the chances of bankruptcy. This study investigated relationships between changes in promoter ownership and changes in leverage by taking a sample of 322 Indian service and manufacturing firms from Top 500 Companies listed on the Bombay Stock Exchange (BSE) for a period of five years (from 2010-2014). The results indicate that changes in promoter ownership play a role in lowering the leverage of Indian firms and, consequently, reducing the chances of bankruptcy. The findings of this study also indicate that changes in promoter ownership have more effect on the leverage of Indian service firms as compared to manufacturing firms. This study contributes to the literature on the factors that affect the leverage of the firm. The findings may be useful for financial managers, investors, financial management consultants, and other stakeholders

Impact of Board Ownership Structure on Firm Value and Excessive Cash Holdings: Evidence from Pakistan

“…Promoter ownership is also widely recognized as one of the important types of board ownership structure that can influence a firm's value. Gill, et al (2015) find that promoter ownership is often regarded as concentrated board ownership by relatives, family members, and friends. The findings of the same study reveal that promoter ownership often reduces a firm's leverage, as most of the shareholders in promoter ownership belong to the same relatives and family.…”

Corporate Ownership Structure and Its Effect on Capital Structure: Evidence from BSE Listed Manufacturing Companies in India

“…The study found that promoter shareholding inversely linked and extensively changes the leverage decisions. The agency theory supports the promoters’ ownership that helps to reduce firms’ financial distress and debt burden by providing effective management affairs (Gill, Obradovich, & Mathur, 2015b; Kaur & Gill, 2008).…”

“…The promoters are restricted from trading on equity that is a higher utilization of bonds, preferred stock, and other debt sources that is expected to maximize the shareholder wealth. (Alhazaimeh et al, 2014; Gill et al, 2015b). The outcome is validated by the agency theory, and the higher promoters’ concentration implies relied on minimizing the agency cost and enhance the firm’s value.…”

“…In India, firms’ ownership is mainly concentrated in promoter groups and governments (Balasubramanian & Anand, 2013). The increased control of the promoters would in turn increase the incentives of the promoters’ or his associates to hold important roles such as a managing director or board of directors (Gill, Obradovich, & Mathur, 2015a; Palaniappan, 2019).…”

Agency Theory, Ownership Structure and Capital Structure: An Empirical Investigation in The Indian Automobile Industry

“…leverage had a positive relationship with concentrated shareholding and had a negative relation with diffuseness of shareholding after controlling for profitability, risk, tangibility, growth, and size. Gill et al (2015) investigated the relationship between capital and promoters shareholding and predicted that managers may take debt to please the shareholders but the risk of bankruptcy is always there and concluded that a change in promoter ownership played a significant role in reducing debt. Tawiah et al (2014) found a strong relationship between promoter ownership structure and board composition and argued that high promoter concentration is a contributing factor for more promoters on the board of the companies.…”