On the determinants and role of secured and unsecured borrowing: Evidence from the Indian corporate sector

Abstract

The post-liberalization period in India has witnessed the emergence of numerous research papers concerning the issue of corporate indebtedness. These research studies however incorporated borrowings from the perspective of tenure, that is, long-term and short-term borrowings, in addition to a measure of total borrowing. While this temporal categorization of financing behavior is important in analyzing capital structure choice, another classification of borrowing based on whether borrowing is secured or unsecured has received scant attention. Consequently, while the role of leverage as an instrument of mitigating agency conflicts and asymmetric information is well appreciated, we do not have any evidence on the role of secured debt in mitigating agency issues, as well as the determinants of secured and unsecured borrowing mix in a firm's total borrowings. This exploratory research paper primarily aims at addressing this issue, using a sample of publicly traded Indian manufacturing firms.