Leverage determinants across nationality: an empirical investigation from India

Purpose Drawing on capital structure and behavioral finance theories, this study examines leverage and its determinants in multinational (MNCs) and domestic corporations (DCs) from India. It further investigates which of the determinants exert stronger impact on the leverage of MNCs relative to DCs. Design/methodology/approach To achieve the objectives, the study uses a sample of 289 Indian companies selected from Business Today-500 from 2009–2018. Leverage is measured using long-term debt to net worth ratio. Panel fixed effect regression was used for analysis. Additionally, system GMM and alternative proxy of leverage are used to ensure the robustness of the results. Findings Indian MNCs appear to be using significantly lesser debt than DCs. Leverage in MNCs is positively impacted by non-debt tax shields (NDTS) and diversification but negatively influenced by dividend payout ratio, profitability, age, size and foreign-exchange risk. Amongst DCs, agency costs based on free cash flow and NDTS encourage debt usage as opposed to profitability and age, which discourage leverage. Further, agency cost based on free cash flows and size disfavor debt usage in MNCs more than DCs. However, tax rate and age favor debt in MNCs more strongly than in DCs. Originality/value This study enriches the literature concerning capital structure by integrating international attributes, namely diversification and foreign-exchange risk, with traditional firm-specific determinants to explain leverage decisions. Furthermore, it examines whether these determinants influence MNCs and DCs differently, thereby providing novel evidence on capital structure dynamics in an emerging economy.