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

Abstract

Purpose – Capital 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/approach – The 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. Findings – The 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/implications – The study covers the impact of the pandemic on Indian companies. Hence, generalization of the findings to global context might not be valid. Practical implications – To 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/value – Developing 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.

Keywords

• Covid-19
• Capital structure
• Leverage
• Bankruptcy risk
• Debt
• Emerging economies