Micro Finance Determinants of Non-traditional Debt Financing

L.V.L.N. Sarma (Malaysia), M. Thenmozhi, and S.K. Preeti (India)


Capital structure, Innovative debt, Micro finance factors, Non-traditional debt financing 1:


: Non-traditional debt instruments, particularly innovative instruments, have been the most preferred choice of firms in capital structure financing. This paper attempts to examine the micro finance factors that influence the firm's choice towards non-traditional debt financing. Various micro finance factors like financial leverage, operating leverage, volatility of earnings, value of collateral assets, non-debt tax shield, profitability, market to book ratio, firm size and firm size relative to economy, interest coverage ratio, price-earnings ratio, bankruptcy cost and cash constraint are identified as the probable discriminating factors. Multiple discriminant analysis shows that financial leverage, non-debt tax shield, profitability, firm size and cash constraint are the most significant factors that discriminate firms using traditional debt financing and those who use non traditional debt financing. The analysis further reveals that a firm that issues non-traditional debt is characterized by high financial leverage, market to book ratio and bankruptcy cost on the one hand and by low level of volatility of earnings, profitability, Value of collateral assets, non-debt tax shield and cash constraint on the other.

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