Debt Financing, Agency Cost and Firm Performance: Evidence from India

Krishna Dayal Pandey · Tarak Nath Sahu

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Corporate Finance and Governance Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

This empirical investigation attempts to enquire into the relationship among debt financing, agency cost and performance of Indian manufacturing firms. The study tries to document the impact of debt financing on firm performance in two different phases of panel data estimations. In the first phase, the study enquires the effect of debt on firms’ profitability measured by ‘return on equity’. The second phase tries to empirically explain the reason behind such impact by introducing agency cost. Considering the manufacturing firms traded in the BSE 200 Index from 2009–2016, the study documents a significant and negative effect of debt on firm performance. The magnitude of debt is also found to be positively affecting the agency cost measured by ‘general and administrative expenses’. So the negative effect of debt on firm performance is reinforced and justified as debt is also found to elevate the agency costs for the firms.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1978Specification Tests in Econometrics 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1997A Survey of Corporate Governance 1977Determinants of corporate borrowing 1991The Theory of Capital Structure 2018International Journal of Business and Social Science 1990Managerial discretion and optimal financing policies

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