An analysis of capital structure heterogeneity for manufacturing and service sector firms

Abstract

Purpose

We aim to analyze the capital structure heterogeneity for manufacturing and service sector firms. Additionally, we analyze the impact of the COVID-19 pandemic on the leverage adjustments of corporate firms.

Design/methodology/approach

This study applies the two-step system generalized method of moments (system-GMM) and panel data of 1,115 manufacturing and 482 service sector firms listed with the Bombay Stock Exchange (S&P BSE) from 2010 to 2023. We developed and analyzed three models. Model 1 analyzes the leverage determinants and speed of adjustment (SOA) for the manufacturing and service sectors. Model 2 evaluates the leverage SOA for various sub-sectors, and Model 3 analyzes the impact of the COVID-19 pandemic on the leverage SOA.

Findings

This study suggests the three following. First, the direction of leverage determinants suggests that manufacturing firms are highly tangible. In contrast, service sector firms are high-growth firms and recorded a higher SOA (12.01%) than manufacturing (9.09%). Second, analyzing the leverage heterogeneity, we found that SOA varies across the sub-sectors. For manufacturing, food and beverage sub-sector recorded the highest SOA (12.58%), while consumer durables reported the lowest (6.38%). Communication recorded the highest (24.15%) for services, while industrial services recorded the lowest (11.18%). Third, firms across sectors and sub-sectors increased their SOA during COVID-19 pandemic.

Research limitations/implications

This in-depth analysis of leverage heterogeneity for different sectors and subsectors will assist policymakers, corporate managers and other stakeholders in making agile financial decisions.

Originality/value

The analysis of leverage heterogeneity for the manufacturing and service sector from the emerging Indian economy marks a novel contribution to existing literature.