The linkage between the firm's financing decisions and real market performance: A panel study of Indian corporate sector

We examine the relationship between quality and reputation signals and firm's product market performance at empirical level. Using data of 533 Indian listed firms over the period 1989-2000, we compare the behavior of top 50 business group firms with the small group and private standalone firms. The empirical results suggest that real market signals like advertisement, marketing, distribution, research and development, ISO third party quality certifications significantly affect firms' performance. Financial decisions by firms in the capital market like issue of commercial paper and debentures may also act as additional signals of firm specific qualities in the product market. For instance, the total sales go up by 2.4% for top 50 business group firms and by 2.5% for non-top 50 firms with a one standard deviation increase in commercial paper as a fraction of assets. Similarly, an increase in debentures relative to assets leads to 9.5% increase in sales for non-top 50 firms in comparison to a 4.7% increase for top 50 firms. We also find that DFI lending helps firms increase expenditure on advertising for product promotion, build distribution networks, increase marketing efforts and research and development, and thereby, boost sales growth significantly in the long run. From regression results and various univariate tests, we find strong empirical evidence that firms' financial decisions drive product market outcomes.