Financial Liberalisation and Corporate Capital Structure: Evidence from India

This paper provides an examination of changes in the financing pattern of the Indian corporate sector following financial liberalization. This is based on an analysis of balance sheet information for 227 companies listed on the Mumbai Stock Exchange (BSE) and covers the period from 1990 to 2007. We present evidence of significant stock market development throughout the process of liberalization. This development is in terms of increased size, liquidity and diversity (i.e. industry composition and firm size). We argue that this reflects improvements in governance and transparency, as well strong economic growth. A result of liberalization and economic growth has been increased profitability for the Indian corporate sector. This has led to a decline in the relative importance of debt, particularly bank loans, as a form of finance for the Indian corporate sector.