Impact of Macroeconomic Condition on Financial Leverage

The objective of this paper is to investigate the role of economic condition on determination of financial leverage and the adjustment speed to target leverage for the Indian manufacturing companies. Using the pooled data and the generalized method of moments estimation techniques, we find the evidence that for the Indian firms, macroeconomic condition plays an important role for determination of financial leverage, all the firms do have the target leverage ratio across macroeconomic conditions and the adjustment speed to target leverage has been pro-cyclical. We also find that financing behavior of the companies is different in good and bad economic conditions for both book and market leverage ratios.