Investment behaviour under financial constraints: a study of Indian firms

Debarati Ghosh () and Meghna Dutta
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Debarati Ghosh: Indian Institute of Technology, Patna

SN Business & Economics, 2021, vol. 1, issue 8, 1-15

Abstract: 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.

Keywords: Investment; Financial constraints; Cash-flow sensitivity; Generalized methods of moments; India (search for similar items in EconPapers)
JEL-codes: C33 D20 D22 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s43546-021-00113-1

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