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

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  • Bhaumik, Sumon Kumar
  • Das, Pranab Kumar
  • Kumbhakar, Subal C.

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 36 (2012)
Issue (Month): 5 ()
Pages: 1311-1319

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Handle: RePEc:eee:jbfina:v:36:y:2012:i:5:p:1311-1319

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Firm investment; Financial constraint; Stochastic frontier analysis; India;

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References

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Cited by:
  1. Herrala, Risto & Turk Ariss, Rima, 2012. "Credit conditions and firm investment: Evidence from the MENA region," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 29/2012, Bank of Finland, Institute for Economies in Transition.
  2. Sumon K. Bhaumik & Ying Zhou, 2014. "Do business groups help or hinder technological progress in emerging markets? Evidence from India," William Davidson Institute Working Papers Series wp1066, William Davidson Institute at the University of Michigan.
  3. Bhaumik, Sumon Kumar & Selarka, Ekta, 2012. "Does ownership concentration improve M&A outcomes in emerging markets?," Journal of Corporate Finance, Elsevier, Elsevier, vol. 18(4), pages 717-726.
  4. Herrala, Risto, 2014. "Forward-looking reaction to bank regulation," Working Paper Series, European Central Bank 1645, European Central Bank.
  5. Risto Herrala & Rima Turk Ariss, 2013. "Credit Constraints, Political Instability, and Capital Accumulation," IMF Working Papers 13/246, International Monetary Fund.

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