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Determinants of Corporate Investment: Post Liberalization Panel Data Evidence from Indian Firms

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  • Bhattacharyya, Surajit

Abstract

The paper models alternative investment-accelerator relationships within the neoclassical theory of Jorgenson followed by firm level panel data estimation and empirical test for other determinants of corporate investment e.g., internal liquidity, profitability, and firms’ financial strength. Athey and Laumas (1994) claimed that internal liquidity had replaced market demand in Indian firm level investment. Others indicate presence of finance constraints in Indian private sector investment activities; Kumar et al. (2001, 2002). Therefore, in the immediate aftermath of liberalization whether market demand had still not been important when availability of internal liquidity, firms’ profitability and creditworthiness are considered. We consider Indian manufacturing firms in the post-reform period of 1990s. There is significant support for the investment–accelerator relationship. Internal liquidity is relatively more important than profitability when it comes to firms’ investment decisions. There is also evidence that credit worthiness of firms to outside creditors is important for firm investment decision.

Suggested Citation

  • Bhattacharyya, Surajit, 2008. "Determinants of Corporate Investment: Post Liberalization Panel Data Evidence from Indian Firms," MPRA Paper 6702, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:6702
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    References listed on IDEAS

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    1. A. Ganesh-Kumar & Kunal Sen & Rajendra R. Vaidya, 2002. "Does the source of financing matter? Financial markets, financial intermediaries and investment in India," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(2), pages 211-228.
    2. Athey, Michael J. & Laumas, Prem S., 1994. "Internal funds and corporate investment in India," Journal of Development Economics, Elsevier, vol. 45(2), pages 287-303, December.
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    5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    6. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    7. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    8. Tybout, James R, 1983. "Credit Rationing and Investment Behavior in a Developing Country," The Review of Economics and Statistics, MIT Press, vol. 65(4), pages 598-607, November.
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    14. Kadapakkam, Palani-Rajan & Kumar, P. C. & Riddick, Leigh A., 1998. "The impact of cash flows and firm size on investment: The international evidence," Journal of Banking & Finance, Elsevier, vol. 22(3), pages 293-320, March.
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    Cited by:

    1. M. Padmaja & Subash Sasidharan, 2021. "Financing constraints and exports: evidence from India," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 45(1), pages 118-145, January.
    2. Sahoo, Pravakar & Bishnoi, Ashwani, 2023. "Drivers of corporate investment in India: The role of firm-specific factors and macroeconomic policy," Economic Modelling, Elsevier, vol. 125(C).
    3. Pravakar Sahoo & Ashwani Bishnoi, 2021. "Drivers of Corporate Investment Slowdown in India: A Firm Level Analysis," IEG Working Papers 441, Institute of Economic Growth.

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    More about this item

    Keywords

    Business fixed investment; sales accelerator; retained earnings; profitability; financial strength;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • L64 - Industrial Organization - - Industry Studies: Manufacturing - - - Other Machinery; Business Equipment; Armaments

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