Debt Financing, Firm Performance and Agency Costs During Covid-19 Pandemic: An Empirical Study.

The study examines the relationship between debt financing and firm performance through the lens of agency costs during the Covid-19 period for standalone firms and firms affiliated with business groups. It does the same for firms engaged in manufacturing and services. Using 4,422 firm-year observations from nonfinancial firms from 2014 to 2020, the study finds that business group firms raised more new debt vis-à-vis standalone firms. On the other hand, service sector firms raised more debt than manufacturing firms. The findings suggest that agency costs declined during the Covid-19 shock, enabling firms to raise debt primarily to increase their liquidity during an uncertain period. Companies had a substantial amount of cash meant for investments in the future. Under these circumstances, corporate governance mechanisms should be strong to prevent the misallocation/misappropriation of funds, thus reducing future agency costs. [ABSTRACT FROM AUTHOR]