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Firm investment, financial constraints and agency costs: evidence from India

Author

Listed:
  • Meera Ancy Vincent

    (Indian Institute of Technology Ropar)

  • Pranab Kumar Das

    (Centre for Studies in Social Sciences Calcutta)

  • Samaresh Bardhan

    (Indian Institute of Technology Ropar)

Abstract

The investment slowdown among Indian firms is a pressing concern with far-reaching implications for the nation’s growth trajectory. Against this backdrop, the present study investigates how finance constraints and agency costs impact firm-level investment efficiency. Based on the Prowess database of Indian private manufacturing firms between 1999 and 2024, we employ two-tier stochastic frontier model (2TSFM) with intra-error dependence to analyse investment inefficiencies arising from under-investment (due to finance constraints) and over-investment (due to agency costs). Our results reveal a significantly negative association between finance constraints and investment, and a significantly positive association between agency costs and investment. Firms with lower agency costs face lesser finance constraints, enabling them to invest more; however, as agency costs increase, this positive effect diminishes, indicating that even some firms with high agency costs still manage to secure external funding. These findings highlight the need for targeted reforms in firm financing and corporate governance to enhance investment efficiency and foster sustained economic growth in emerging economies such as India.

Suggested Citation

  • Meera Ancy Vincent & Pranab Kumar Das & Samaresh Bardhan, 2025. "Firm investment, financial constraints and agency costs: evidence from India," Empirical Economics, Springer, vol. 69(6), pages 3463-3509, December.
    • Handle: RePEc:spr:empeco:v:69:y:2025:i:6:d:10.1007_s00181-025-02830-0
    DOI: 10.1007/s00181-025-02830-0
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    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G01 - Financial Economics - - General - - - Financial Crises

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