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Directed credit and investment in small scale industry in India: evidence from firm-level data 1965-78

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  • Eastwood, Robert
  • Kohli, Renu

Abstract

Panel data on 788 modern sector Indian firms during 1965-78 are used to analyse the link between the size of a firm and its financial environment. Exogeneity tests reveal that large firms with improved investment prospects could obtain external finance at the margin, but that small firms could not. The policy of directing bank credit accordingly relaxed a binding constraint on small firms, raising investment. Assuming that all of the rise in the credit-sales ratio in small firms was policy-induced then so was about one third of the 170 per cent rise during 1965—78 in their investment—sales ratio.

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Bibliographic Info

Paper provided by Department of Economics, University of Sussex in its series Discussion Papers in Economics with number 02/97.

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Date of creation: Oct 1997
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Handle: RePEc:sus:susedp:02/97

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  1. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 433-46, August.
  2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  3. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
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Cited by:
  1. Robin Burgess & Rohini Pande, 2003. "Do rural banks matter? evidence from the Indian social banking experiment," LSE Research Online Documents on Economics 2244, London School of Economics and Political Science, LSE Library.
  2. Sriram M S, . "Productivity of Rural Credit: A Review of Issues and Some Recent Literature," IIMA Working Papers WP2007-06-01, Indian Institute of Management Ahmedabad, Research and Publication Department.

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