Indebtedness in the small and midcap segments: new evidences from Indian manufacturing sector

Abstract

This paper analyzes the financing pattern and determinants of indebtedness for 412 listed small and midcap manufacturing firms for the period from 2005–2006 to 2010–2011. Our findings indicate that for these firms, bank borrowing is the primary source of external financing and is predominantly secured in nature. In spite of the fact that sampled firms are from the manufacturing sector, the average share of borrowed capital is almost equal to that of owners’ equity for the 6 years under consideration. Our findings also indicate that current liabilities are a major source of financing for these firms. In so far as the applicability of existing theories of capital structure is concerned, our evidence is not explained by either the trade-off-based theories of capital structure or the pecking order theory; rather our findings contradict the predictions of theory, except for the limited evidence on the validity of asymmetric information-based interpretations of capital structure.