A stochastic frontier approach to modelling financial constraints in firms: An application to India

Sumon Bhaumik, Pranab Das () and Subal Kumbhakar

Journal of Banking & Finance, 2012, vol. 36, issue 5, 1311-1319

Abstract: We propose the use of stochastic frontier approach to modelling financial constraints of firms. The main advantage of the stochastic frontier approach over the stylised approaches that use pooled OLS or fixed effects panel regression models is that we can not only decide whether or not the average firm is financially constrained, but also estimate a measure of the degree of the constraint for each firm and for each time period, and also the marginal impact of firm characteristics on this measure. We then apply the stochastic frontier approach to a panel of Indian manufacturing firms, for the 1997–2006 period. In our application, we highlight and discuss the aforementioned advantages, while also demonstrating that the stochastic frontier approach generates regression estimates that are consistent with the stylised intuition found in the literature on financial constraint and the wider literature on the Indian credit/capital market.

Keywords: Firm investment; Financial constraint; Stochastic frontier analysis; India (search for similar items in EconPapers)
JEL-codes: C51 G31 G32 L21 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (35)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:5:p:1311-1319

DOI: 10.1016/j.jbankfin.2011.11.026

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