Firm Investment & Credit Constraints in India, 1997 – 2006: A stochastic frontier approach

Sumon Bhaumik, Pranab Kumar Das and Subal Kumbhakar

No wp1010, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: We use the stochastic frontier approach to estimate the impact of firm characteristics on investment decisions of Indian firms during the 1997-2006 period. The use of the stochastic frontier approach allows us to define the (unobserved) optimum investment that is consistent with a firm's characteristics such as the Tobin‟s q during each firm-year, and then estimate the deviation from this unobserved optimum in the form of an (investment) efficiency score that varies between zero and one. This deviation is interpreted as the degree of credit constraint, and we are also able to estimate the impact of firm characteristics such as leverage and business group affiliation on the degree of credit constraint via their marginal effects. Our results suggest that the degree of credit constraint of an average firm increased over time during the sample period, despite significant reforms of the Indian banking sector by the turn of the century. We also find that the degree of credit constraint decreases with cash flow and assets, which is consistent with the available literature. Further, there is a threshold effect of leverage, and the degree of credit constraint is greater for highly leveraged firms. Finally, we find that the beneficial impact of business group affiliation on the degree of credit constraint decreases over time, and is eliminated by the end of the sample period.

Keywords: Investment; Credit rationing; Imperfect information; Stochastic frontier analysis (search for similar items in EconPapers)
JEL-codes: C23 C24 D82 D92 G31 G32 (search for similar items in EconPapers)
Pages: pages
Date: 2011-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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