DOES THE STRUCTURE OF DEBT AFFECT THE OUTPUT AND INVESTMENT STRATEGIES OF THE FIRM

Abstract

The paper examines the impact of differential maturity structures of debt, i.e., short-term and long-term debts on the output, gross investments, and technology-upgrading strategies of the firms in certain oligopolistic industries in India. We first develop a simple theoretical model to motivate the analysis. The empirical analysis shows that debt as a whole may have a negative impact on the choice of output and investment levels of the firms. However, the short-term debts make firms behave in a conservative fashion vis-a-vis their output and investment strategies, while long-term debts make firms behave more aggressively. Debt, irrespective of its structure, forces the firms to upgrade their technology. Total debt is found to have a negative impact on profitability, but firms with higher long-term debts have higher profitability.