The impact of Covid-19 on the capital structure in emerging economies: evidence from India

Abstract

PurposeCapital structure is an important corporate financing decision, particularly for companies in emerging economies. This paper attempts to understand whether the pandemic had any significant impact on the capital structure of companies in emerging economies. India being a prominent emerging economy is an ideal candidate for the analysis.Design/methodology/approachThe study utilizes three leverage ratios in an extended market index, BSE500, for the period 2015–2021. The ratios considered are short-term leverage ratio (STLR), long-term leverage ratio (LTLR) and total leverage ratio (TLR). A dummy variable differentiates the pre-epidemic (2015–2019) and pandemic (2020–2021) period. Control variables are used to represent firm characteristics such as growth, tangibility, profit, size and liquidity. Dynamic panel data regression is employed to address endogeneity.FindingsThe findings point out that Covid-19 has had a significant, negative effect on LTLR, while the impact on STLR and TLR was insignificant. The findings indicate that companies based in a culturally risk-averse environment, such as India, would reduce the long-term debt to avoid bankruptcy in times of uncertainty.Research limitations/implicationsThe study covers the impact of the pandemic on Indian companies. Hence, generalization of the findings to global context might not be valid.Practical implicationsTo maintain economic growth in the post-crisis period, Indian policymakers should ensure accessibility to low-cost capital. The findings provide impetus to deepen the insignificant corporate bond market in India for future economic revival.Originality/valueDeveloping countries are struggling to revive the economies postpandemic. This is particularly true for Asian economies which are heavily reliant on banks for survival. This research finds evidence to utilize bond market as a source of raising capital for economic revival.

The Moderating Effect Of The Pandemic On Capital Structure And Firm Performance In Malaysia

“…ROE showed an increment during the pandemic as a result of the increase in DTA and LDTA, which shrank the equity portion and caused ROE to improve. The DTA and LTDA showed an increment during the pandemic, which was in contrast to the studies done by Mohd Azhari et al ( 2022) and Prakash et al (2022), where they found firms decreased their debts during the pandemic period. DTA was seen to slightly increase from 20.12% to 20.2%, whereas LTDA increased from 0.09% to 0.10%.…”

“…This is supported by Mohd Azhari et al ( 2022), who found the presence of the pecking order theory before and during the pandemic. The same study in India also found the presence of the pecking order theory during the pandemic (Prakash et al, 2022).…”

A Global Analysis of the COVID-19 Pandemic and Capital Structure in the Consumer Goods Sector

“…Regarding the COVID-19, extensive research has been conducted to understand how the COVID-19 pandemic has influenced the financial structures of companies across various industries and regions. These studies have shed light on the intricate relationship between external shocks like a global pandemic and a company's capital structure choices (Prakash et al 2023;Faturohman and Noviandy 2022;Nguyen et al 2023;Vo et al 2022;Haque and Varghese 2023;Gopalakrishnan et al 2022). In this discussion, we explore several key studies that have examined the impact of COVID-19 on the capital structures of firms in different sectors and geographical locations.…”

“…These findings underscore the importance of understanding how external shocks influence financial decisions. Meanwhile, Faturohman and Noviandy (2022), Prakash et al (2023), and Vo et al (2022) showed the intricacies of capital structure adjustments in the midst of a pandemic. However, studies of the broader impact of the COVID-19 pandemic, affecting various industries, market types, and global regions, have not yet been studied.…”

“…To the best of our knowledge, no prior study has delved into this specific area, highlighting the novelty of our research. Whereas earlier research has explored the effects of COVID-19 on capital structures, these have often concentrated on broader industries or market types, missing the nuanced dynamics of the consumer goods sector (Alrwashdeh et al 2023;Faturohman and Noviandy 2022;Gopalakrishnan et al 2022;Haque and Varghese 2023;Kim 2023;Nguyen et al 2023;Prakash et al 2023;Vo et al 2022).…”