Export Intensity and Financial Leverage of Indian firms

The export sector is considered an important sector for developing countries; hence it is important to understand the behavior of exporting firms. This paper looks at the financial structure of such firms and investigates plausible relationships between export status and leverage. If product demand from abroad has a low correlation with domestic demand, we would expect export-intensive firms to have greater cashflow stability than firms that only sell domestically due to this diversification; this implies that they would also be able to support higher financial leverage. On the other hand, exporting firms have been shown to incorporate intangible assets which allow them to increase their profitability; this would suggest a lower debt ratio. We test these hypotheses by looking at a sample of Indian firms. The diversification and cashflow stability hypotheses are accepted. We also provide evidence on the determinants of capital structure for Indian firms over the last decade. Our results, which are consistent with theoretical expectations, yield the following conclusions: larger firms have more debt; firms with greater cashflow volatility have less debt; firms with greater availability of internal funds use less debt; and, finally, firms with more collateralizable assets – viz. firms that are less growth-oriented, more capital intensive and with less intangibles and R&D all have more debt. Export Intensity and Financial Leverage of Indian firms