Investment and Capital Market Imperfections: Some Evidence from a Developing Economy, India

Investment and Capital Market Imperfections: Some Evidence from a Developing Economy, India This paper presents a switching regression model of investment decision where the probability of a firm facing financial constraint is endogenously determined. The approach, therefore, obviates the use of a priori criteria to exogenously identify the financially constrained firms, and thereby addresses the potential misclassification problem faced in the existing literature. A sample of 576 Indian manufacturing firms, collected across 15 broad industries is used for this study. The study establishes that financially constrained firms exhibit a much higher investment-cash flow sensitivity than those identified to be unconstrained. It also probes into the possible determinants of financial constraints, and finds empirical support for its hypothesis that young, liquidity constrained and low dividend payout firms are more likely to face financial constraints, when compared to their respective counterparts. This paper also provides some insight into the impact of the ongoing liberalization program on the financial constraints faced by the Indian firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Pacific Basin Financial Markets and Policies World Scientific Publishing Company

Investment and Capital Market Imperfections: Some Evidence from a Developing Economy, India

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Publisher
World Scientific Publishing Company
Copyright
Copyright ©
ISSN
0219-0915
eISSN
1793-6705
D.O.I.
10.1142/S0219091508001416
Publisher site
See Article on Publisher Site

Abstract

This paper presents a switching regression model of investment decision where the probability of a firm facing financial constraint is endogenously determined. The approach, therefore, obviates the use of a priori criteria to exogenously identify the financially constrained firms, and thereby addresses the potential misclassification problem faced in the existing literature. A sample of 576 Indian manufacturing firms, collected across 15 broad industries is used for this study. The study establishes that financially constrained firms exhibit a much higher investment-cash flow sensitivity than those identified to be unconstrained. It also probes into the possible determinants of financial constraints, and finds empirical support for its hypothesis that young, liquidity constrained and low dividend payout firms are more likely to face financial constraints, when compared to their respective counterparts. This paper also provides some insight into the impact of the ongoing liberalization program on the financial constraints faced by the Indian firms.

Journal

Review of Pacific Basin Financial Markets and PoliciesWorld Scientific Publishing Company

Published: Sep 1, 2008

Keywords: Investment capital market imperfection financial constraints emerging economy India

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