The effect of macroeconomic attributes on target leverage adjustment: an evidence from emerging economy

Purpose This study investigates the impact of macroeconomic growth conditions and uncertainties on the leverage speed of adjustment (SOA) of corporate firms in the context of an emerging economy. Design/methodology/approach Using the dynamic panel estimators and panel data of 1,134 manufacturing firms listed with the S&P Bombay Stock Exchange from 2007 to 2024. We empirically analyse the effects of high (low) growth macroeconomic conditions of GDP growth, inflation rate, security market, bond market, real interest rate and credit spreads on leverage adjustment. Additionally, we analysed the effect of economic crises and policy uncertainties on target leverage adjustments. Findings This study report evidences that macroeconomic conditions affect the target leverage adjustment of Indian firms. Firms tend to increase (decrease) their leverage SOA in high (low) growth conditions. During the economic crises and policy uncertainties, firms tend to increase their leverage SOA, which suggest that facing macroeconomic uncertainties, firms increase leverage SOA to encounter the cash flow issues and remain financially flexible. Research limitations/implications This study provides important insights to stakeholders and policymakers to make sustainable financial decisions. The findings of this study can be generalizable to other industries or economies by incorporating their idiosyncratic characteristics. Originality/value The present study makes a novel contribution to the literature by analysing the leverage adjustment behaviour of firms in both macroeconomic growth and uncertainty conditions, which provide a new insight into capital structure dynamics for emerging markets.