DEBT FINANCING AND SHAREHOLDERS’ RETURN: A STUDY OF BSE 500 COMPANIES

Abstract

In determining relationship between level of debt and profitability, the earlier empirical studies mostly considered the level of debt or leverage ratio as dependant variable and profitability as one of the independent variables without conducting any test of exogeneity among variables. The introduction of fresh capital may have an impact on profitability but not necessarily instantaneously. The most of the analysis did not consider the lag of level of debt. In this context, this paper seeks to find out the relationship between debt financing and shareholders’ return in Indian context afresh. Granger Causality has been applied to ascertain the direction of relationship among variables. The fixed effect model has been applied on the panel data of BSE 500 companies during the period 2000 to 2015. The paper observed that there is statistically significant relationship between debt-equity ratio and shareholders’ return.