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Investment behaviour under financial constraints: a study of Indian firms

Author

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  • Debarati Ghosh

    (Indian Institute of Technology, Patna)

  • Meghna Dutta

    (Indian Institute of Technology, Patna)

Abstract

Firms under financial constraints depend more on their internal funds when it comes to financing their investment and production activities due to a dearth of external finances. This paper conducts a study on Indian manufacturing firms for the period 2010–2019 to explore the usefulness of cash-flow sensitivity of investment as a measure of financial constraints. The study also focuses on the determinants of investment under financial constraints. Firms have been classified into financially constrained and unconstrained firms based on some a priori observable indicators, such as the prevailing uncertainty, business group affiliation, and market capitalization. The result provides evidence that the investment decision of financially constrained firms faces a higher degree of cash-flow sensitivity. Furthermore, asset tangibility is found to reduce the financial constraints of firms, thereby uplifting investments.

Suggested Citation

  • Debarati Ghosh & Meghna Dutta, 2021. "Investment behaviour under financial constraints: a study of Indian firms," SN Business & Economics, Springer, vol. 1(8), pages 1-15, August.
    • Handle: RePEc:spr:snbeco:v:1:y:2021:i:8:d:10.1007_s43546-021-00113-1
    DOI: 10.1007/s43546-021-00113-1
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    Cited by:

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    More about this item

    Keywords

    Investment; Financial constraints; Cash-flow sensitivity; Generalized methods of moments; India;
    All these keywords.

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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