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Does financial liberalisation reduce credit constraints: A study of firms in the Indian private corporate sector

In: Proceedings of FIKUSZ '09

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  • Dr. V.R Prabhakaran NAIR

    () (Sanatana Dharma College, Alappuzha – 3, Kerala, India)

Abstract

The study analyses the determinants of investment of the private corporate manufacturing sector in India in the context of financial liberalization. Though financial liberalization is still on the way, based on the theoretical argument of financial liberalization and its limitations in the context of asymmetric information and market imperfections, such an analysis assumes significance. Because, in imperfect financial markets with asymmetric information, external funds are more expensive than internal funds and firms have to follow a hierarchy in which cheaper funds are preferable to more expensive ones and internal funds are the most preferred ones. We tested the hypothesis that whether financial liberalization had an impact on firms’ investment decisions with respect to cash flow and debt. The study found that small firms are facing financial market imperfections in the form of liquidity constraints since it is seen that credit constraints were not eliminated or relaxed for these firms. Against this, one surprising result is the positive and significant coefficient of debt-to-capital ratio for large firms irrespective of the financial liberalisation effect. From further enquiry we found that the positive and significant impact of debt on investment for large firms has changed once we estimate the model for large firms according other categories based on group and export orientation. It is seen that the positive and significant impact of debt does not hold for large non-group and non-exporting firms. On the other hand, the positive effect of debt remains the same for large group and exporting firms. To conclude, market imperfections exist in the financial markets that prevent an economy wide efficiency in the post liberalisation period.

Suggested Citation

  • Dr. V.R Prabhakaran NAIR, 2009. "Does financial liberalisation reduce credit constraints: A study of firms in the Indian private corporate sector," Proceedings of FIKUSZ '09, in: László Áron Kóczy (ed.), Proceedings of FIKUSZ '09, pages 147-160, Óbuda University, Keleti Faculty of Business and Management.
  • Handle: RePEc:pkk:sfyr09:147-160
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    File URL: http://uni-obuda.hu/users/vecseya/RePEc/pkk/sfyr09/Nair_Prabhakaran_Dr.pdf
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    References listed on IDEAS

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    1. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
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    Keywords

    Information Asmmetry; Market Imperfection; Investment; Financing Pattern; Corporate Sector;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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