In this paper we explore in the Indian context, the impact of a low leverage policy on equity market and operating performance of a firm. Our results indicate that firms with negligible debt on their balance sheet exhibit superior equity performance particularly the firms which become low leverage during market downturns, when the prospects are more uncertain. We also find that this superior equity market performance is not merely due to a positive investor perception about the potential benefits of a robust debt free balance sheet. Evidence shows that the low leverage firms register higher business risk and significantly superior operating performance post being low leverage. We conclude that Indian managers, in the low leverage firms, take full advantage of the increased flexibility available with them due to low debt, venture into riskier but more rewarding avenues, and actually create incremental value for their shareholders.
|Journal||Indian Finance Conference|