Indebtedness in Indian unlisted firms

Abstract

This paper analyzes the financing pattern of a sample of 1,161 unlisted firms over the period 2006–2007 to 2010–2011. At an aggregate level, our findings reveal the primacy of borrowings from banks as the most important source of financing for these firms. Another important source of financing for unlisted firms is current liabilities. With regard to the determinants of indebtedness our findings do not indicate the conclusive validity of either the asymmetric information based theories of capital structure, or the agency based interpretations. There is however statistically significant evidence of distress borrowings, and borrowings to tide over liquidity problems by unlisted firms. Our findings also reveal that unlisted firms take recourse to bank borrowing to tide over liquidity problems and bank borrowing, though the primary source of borrowed funds is not high on the pecking order of raising finance externally. Our evidence is also indicative of the fact that bank financing and its associated monitoring role does not enhance efficiency of Indian unlisted firms.