Capital structure and performance: Evidence from a transition economy on an aspect of corporate governance

This paper examines the relationship between the levels of debt in the capi tal structure and performance for a sample of Indian firms. Existing theory posits a positive relationship; however, analysis of the data reveals the relationship for Indian firms to be significantly negative. The structure o f capital markets in India, where both short-term and long-term lending ins titutions are government-owned, is hypothesized to account for the finding of this relationship, and it asserted that corporate governance mechanisms which work in the West will not work in the Indian context unless the suppl y of loan capital is privatized.