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Cash Holdings and Finance Constraints in Indian Manufacturing Firms

Listed author(s):
  • Vikash Gautam

    ()

    (Chandragupt Institute of Management)

  • Ashish Singh

    ()

    (Indian Institute of Technology)

  • Sarthak Gaurav

    (London School of Economics)

This paper attempts to explore the effect of finance constraints by examining the propensity of firms to save cash out of cash flows. Drawing on cash-cash flow sensitivity (CCFS), we overcome the errors in attributing information in cash flows to real and financial components. We employ endogenous regime switching model for our empirical exercise. This model allows for multiple sorting variables, does not require finance constraints to increase monotonically with the sorting variables and enables firms to endogenously change regime over the sample period. Our findings suggest that firms portray significantly higher CCFS in the event of finance constraints.

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Article provided by Macrothink Institute in its journal Research in Applied Economics.

Volume (Year): 6 (2014)
Issue (Month): 3 (September)
Pages: 56-75

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Handle: RePEc:mth:raee88:v:6:y:2014:i:3:p:56-75
Contact details of provider: Web page: http://www.macrothink.org/journal/index.php/rae

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  1. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  3. Yi-Chen Lin, 2007. "The cash flow sensitivity of cash: evidence from Taiwan," Applied Financial Economics, Taylor & Francis Journals, vol. 17(12), pages 1013-1024.
  4. Edith Ginglinger & Khaoula Saddour, 2007. "Cash holdings, corporate governance and financial constraints," Post-Print halshs-00162411, HAL.
  5. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  6. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1991. "Corporate Structure, Liquidity, and Investment: Evidence from Japanese Industrial Groups," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 33-60.
  7. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
  8. Timothy A. Kruse, 2002. "Asset Liquidity and the Determinants of Asset Sales by Poorly Performing Firms," Financial Management, Financial Management Association, vol. 31(4), Winter.
  9. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  10. 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.
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