Agency Cost, Growth Options, and Debt Maturity in the Indian Corporate Sector

The debt maturity literature has established that agency cost problems, information asymmetry, and liquidity risk are important factors which determine the corporate debt maturity structure. Using panel OLS regression methodology on a panel data of 266 firms drawn from BSE 500, this research paper investigates empirically how agency cost determines debt maturity decisions in the Indian corporate sector. The agency cost hypothesis established that agency problems caused by the conflict of interest between shareholders and bondholders can be mitigated through short-term debt maturity. Therefore, debt maturity is inversely related. The research finds that the coefficient of growth options is positive and significant as against the empirical prediction that debt maturity and growth options are inversely related. However, the positive and significant coefficient on growth options reveals the severity of agency problems in the Indian corporate sector. The research findings lead to the conclusion that debt- equity conflicts over the exercising of growth options are mitigated by not issuing short-term debt. Maturity matching, long-term debt with call and sinking fund provisions, bank debt, secured debt, and debt with covenants are the corporate borrowing strategies adopted by the Indian companies to deal with agency problems, information asymmetry, and liquidity risk.