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Effect of Capital Structure on Firms' Product Market Performance

This paper empirically examines the effect of a firm?s capital structure on its product market outcome. The strategic consideration in the product market may induce Indian corporates to take on higher debt in order to gain strategic advantage. Using a balanced panel of 538 Indian manufacturing firms over the period 1989 to 2000, the paper studies the relationship between short- and long-term debt and sales performance (export as well as total sales). In the case of long-term debt, firms take time to build their infrastructure. Hence, considering a longer time horizon of two years and seven years of taking the loan, the paper finds that long-term debt boosts sales growth of firms belonging to the top 50 and large business houses. However, long-term debt is inconsequential for total growth of sales for smaller group and unaffiliated firms. The study finds empirical evidence on the interplay between the financial structure and product market performance in the Indian corporate sector.

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