Does Secured Debt Resolve Agency Conflicts and Problems of Asymmetric Information? Evidence from Indian Corporate Sector

Corporate indebtedness has been one of the most examined topics in empirical corporate finance literature. In the Indian context, research studies on this issue that emerged in the post-liberalization period classified borrowing (the explained variable) based on time perspective, namely: long-term and short-term. While this temporal categorization of borrowed capital remains important in analyzing capital structure choice, an alternative categorization based on whether borrowing is collateralized (secured) or not, has remained off focus. Consequently, the role of secured debt in addressing agency issues and problems of asymmetric information has remained largely unexplored. This exploratory research paper aims at addressing this issue, using a sample of manufacturing firms listed in the BSE 500 and SNP CNX 500 index. Our findings indicate that the incidence of secured debt is higher in firms endowed with tangible assets and is inversely related to firm size and growth opportunities. Variables like firm age and risk does not have any significant bearing on secured debt ratio. This paper provides no evidence with regard to the role of secured debt in mitigating agency issues and problems of asymmetric information.