What determines firms' zero-leverage policy in India?

Purpose - This paper studies the relationship between characteristics of firms' and their propensity to maintain zero-leverage (ZL). Its second objective is to examine the impact of macroeconomic conditions on firms' ZL policy. Finally, the purpose of this paper is to explore the underlying motives behind eschewing debt for constrained and unconstrained firms. Design/methodology/approach - The paper uses data of 2001 non-financial and non-utility listed Indian firms over a period of 2005-2013 from Capitaline database. Size quintiles and dividend payment status have been used to differentiate between constrained and unconstrained firms. It uses t-test and logistic regression to draw inferences. Findings - In general, firms pursuing ZL policy are financially constrained. However, there is a sub-section of ZL firms found unconstrained with high profitability. They appear to be self-sufficient to meet their financing requirements. Finally, macroeconomic conditions are counter cyclically related to firms' ZL policy. Research limitations/implications - The impact of corporate governance practices on firms' ZL policy could not be examined due to data inadequacy. However, financial constraints and the presence of ZL firms come out as important factors to be paid special attention for future empirical works on capital structure. Practical implications - The findings can be useful for financial managers in designing capital structure on the basis of their financial position. Originality/value - Previous studies on ZL phenomenon are based on developed countries. The findings of previous studies conducted for developed countries get revalidated for the first time in the context of an emerging economy like India.