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Debt maturity and firm performance : a panel study of Indian companies
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Debt maturity and firm performance : a panel study of Indian companies

Author

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  • Schiantarelli, Fabio
  • Srivastava, Vivek

Abstract

Economic policy makers traditionally hold the view that, because of imperfections in capital markets, a shortage of long-term finance acts as a barrier to industrial performance and growth. Long term finance is thought to allow firms to invest in more productive technologies, even when they do not produce immediate payoffs, without fear of premature liquidation. As a result, special state-supported term-lending institutions have been established, especially in developing countries. But some believe that short-term finance may offer better incentives because it allows suppliers of finance to monitor and control firms more effectively, thus improving the firms'performance. The authors empirically investigate the determinants and consequences of the term structure of debt. Using a rich panel of data on privately owned companies in India, they also examine the influence of debt maturity structures on those firm's performance, especially on productivity. The results are not conclusive, but seem to support conventional beliefs about the importance of long term finance to firm performance. Heavy leveraging, however, has a strong negative impact on productivity. They base their econometric evidence on estimates of a maturity equation and of a production function augmented by financial variables. The data on which these results are based have been generated by a financial system in which there is little competition, in which state-owned financial institutions are not guided by the profit motive and have no control over interest rates, so one cannot say whether short term finance would have been more beneficial in a less regulated system. Moreover, by the end of the 1980s, the capital base of India's government-owned financial institutions had been severely eroded and they carried a heavy burden of nonperforming assets. This means that the benefits of long term finance must be weighed against the costs.

Suggested Citation

  • Schiantarelli, Fabio & Srivastava, Vivek, 1997. "Debt maturity and firm performance : a panel study of Indian companies," Policy Research Working Paper Series 1724, The World Bank.
    • Handle: RePEc:wbk:wbrwps:1724
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    Citations

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    Cited by:

    1. Julian Kozlowski, 2021. "Long-Term Finance and Investment with Frictional Asset Markets," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(4), pages 411-448, October.
    2. Demirgüç-Kunt, Asli & Horváth, Bálint L. & Huizinga, Harry, 2017. "How does long-term finance affect economic volatility?," Journal of Financial Stability, Elsevier, vol. 33(C), pages 41-59.
    3. Antonio D’Amato, 2020. "Capital structure, debt maturity, and financial crisis: empirical evidence from SMEs," Small Business Economics, Springer, vol. 55(4), pages 919-941, December.
    4. Gatti, Roberta & Love, Inessa, 2006. "Does access to credit improve productivity ? Evidence from Bulgarian firms," Policy Research Working Paper Series 3921, The World Bank.
    5. Florian Leon, 2019. "The provision of long-term credit and firm growth," DEM Discussion Paper Series 19-08, Department of Economics at the University of Luxembourg.
    6. Julian Kozlowski, 2017. "Long-Term Finance and Economic Development: The Role of Liquidity in Corporate Debt Markets," 2017 Meeting Papers 699, Society for Economic Dynamics.
    7. Sommer, Christoph, 2021. "The impact of patient capital on job quality, investments and firm performance: Cross-country evidence on long-term finance," IDOS Discussion Papers 6/2021, German Institute of Development and Sustainability (IDOS).
    8. Léon, Florian, 2020. "The provision of long-term credit and firm growth in developing countries," Economic Modelling, Elsevier, vol. 90(C), pages 66-78.

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