The study had two objectives : (i) to ascertain the corporate managers' attitudes about the use of leverage, and (ii) to examine, in the light of the attitudes so revealed, the industrial pattern, trend and volatilities, of leverage, and the impact of size, profitability and growth on leverage. To achieve the first objective of the study a questionnaire survey was conducted. Questionnaires were sent to 100 selected companies, out of which 30 responses were received. The analysis of questionnaires revealed that a large number of managers considered ordinary share capital as the most expensive and the long-term debt as the least expensive. Consistent with theory, majority of them felt that ordinary share capital and retained earnings were not cost free, and the opportunity cost is the cost of such sources. Corporate managers also showed a strong preference for borrowing because of the low cost of debt due to the tax deductibility of interest and complicated procedures for raising the equity capital. About one-third managers stated that they would prefer to borrow subject to the internal characteristics of their companies and external constraints. In the opinion of the responding managers, profitability, quality of management and security were the most important factors which a lender would examine at the time of considering their loan request. They also felt that profit-variability was least important factor. It is a significant finding that almost all respondents were aware of the concept of the optimum capital structure. Most of them defined it in terms of the maximum value or the minimum cost of capital to the firm. For the purpose of the second objective of the study, data for 743 companies in 18 industrial groups were collected and analysed. To examine the trend and stability of the leverage pattern over years, 8-year data (1973-74 to 1980-81) were studied. All those companies listed on the Bombay Stock Exchange were included for which data were available. The highly favourable attitude of the corporate managers towards the use of leverage is borne out by the very high level of debt employed by the Indian industries. Considering all companies together, about 70-80% of their assets are financed by debt (including current liabilities). Companies employed trade credit as much as bank borrowings. The level of leverage in all industries have increased in the recent years as compared to 1973-74. It was also indicated that classifying leverage percentages by the type of industry does not produce any patterns which could be regarded systematic and significant. The trends and volatilities associated with the leverage percentages also do not support the belief that the type of industry had an impact on the degree of leverage. The study also did not indicate a definite structure relationship between leverage on the one hand and size, profitability and growth on the other. Two implications of the use of high leverage are obvious : First in the long-run companies will not only loose their commercial flexibilities, but they would also be exposed to the danger of insolvency under the widely fluctuating economic environment in India. Second the excessive use of debt has consequence for the economic system. High level of debut also results in leveraging the economic power. The growth of the capital market for equity capital is suspected to remain restrained when excessive debt is employed, and as a consequence, the economic power would get concentrated in the hands of a few person in the companies. Such potential concentration of power would prove counter-productive to the economic system. The question of debt policy of the companies is related to issues such as the government's industrial, fiscal and monetary policies, the interest rate structure, the state of capital and money markets and strategies to develop them, the financial performance of the companies and the disclosure practices, the lending policies of the financial institutions and so on. Another important question which needs debate in context of the findings of the prest study is : Should not interest charges, like equity and preference dividends, be disallowed as deductible expense? If a company has a separate entity from its owners and lenders and if the total funds employed by the company is a pool of capital, it does not seem logical to distinguish between the earnings of owners and lenders for tax purposes.
