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Investment and Capital Market Imperfections: Some Evidence from a Developing Economy, India

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  • Saumitra N. Bhaduri

    (Madras School of Economics, Gandhi Mandapam Road, Chennai-600 025, India)

Abstract

This paper presents a switching regression model of investment decision where the probability of a firm facing financial constraint is endogenously determined. The approach, therefore, obviates the use ofa prioricriteria to exogenously identify the financially constrained firms, and thereby addresses the potential misclassification problem faced in the existing literature. A sample of 576 Indian manufacturing firms, collected across 15 broad industries is used for this study. The study establishes that financially constrained firms exhibit a much higher investment-cash flow sensitivity than those identified to be unconstrained. It also probes into the possible determinants of financial constraints, and finds empirical support for its hypothesis that young, liquidity constrained and low dividend payout firms are more likely to face financial constraints, when compared to their respective counterparts. This paper also provides some insight into the impact of the ongoing liberalization program on the financial constraints faced by the Indian firms.

Suggested Citation

  • Saumitra N. Bhaduri, 2008. "Investment and Capital Market Imperfections: Some Evidence from a Developing Economy, India," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 11(03), pages 411-428.
    • Handle: RePEc:wsi:rpbfmp:v:11:y:2008:i:03:n:s0219091508001416
    DOI: 10.1142/S0219091508001416
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    References listed on IDEAS

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    1. Laeven, Luc, 2000. "Does financial liberalization relax financing constraints on firms ?," Policy Research Working Paper Series 2467, The World Bank.
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    Cited by:

    1. Chung-Hua Shen & Chih-Yung Lin, 2016. "Political connections, financial constraints, and corporate investment," Review of Quantitative Finance and Accounting, Springer, vol. 47(2), pages 343-368, August.
    2. Vikash Gautam & Rajendra R. Vaidya, 2018. "Evidence on the determinants of investment-cash flow sensitivity," Indian Economic Review, Springer, vol. 53(1), pages 229-244, December.
    3. Benard Kipyegon Kirui & Nelson H.W. Wawire, 2018. "Measures of Financial Constraints in Kenya," International Journal of Economics and Financial Issues, Econjournals, vol. 8(1), pages 217-231.
    4. Carlos Carreira & Filipe Silva, 2010. "No Deep Pockets: Some Stylized Empirical Results On Firms’ Financial Constraints," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 731-753, September.
    5. Pranab Kumar Das, 2014. "Finance Constraint and Firm Investment: A Survey of Econometric Methodology," Accounting and Finance Research, Sciedu Press, vol. 3(2), pages 138-138, May.
    6. Athreye, Suma & Saeed, Abubakr & Baloch, Muhammad Saad, 2021. "Financial crisis of 2008 and outward foreign investments from China and India," Journal of World Business, Elsevier, vol. 56(3).
    7. Malcolm Athaide & H. K. Pradhan, 0. "A model of credit constraint for MSMEs in India," Small Business Economics, Springer, vol. 0, pages 1-19.
    8. Malcolm Athaide & H. K. Pradhan, 2020. "A model of credit constraint for MSMEs in India," Small Business Economics, Springer, vol. 55(4), pages 1159-1177, December.

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    More about this item

    Keywords

    Investment; capital market imperfection; financial constraints; emerging economy; India;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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