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Impact of Liquidity constraint on Firms’ Investment Decisions

  • Ghosh, Saibal
  • Ghosh, Saurabh

The paper investigates whether the effects of monetary policy on firm investment can be transmitted through leverage. The findings indicate that monetary contractions reduce investment for highly leveraged firms. The estimates imply that a 1percentage point increase in leverage reduces investment by 0.109 percent through leverage. Robustness tests broadly validate these findings.

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File URL: https://mpra.ub.uni-muenchen.de/17181/1/MPRA_paper_17181.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17181.

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Date of creation: 2006
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Publication status: Published in Economia Internazionale 1.54(2006): pp. 17-32
Handle: RePEc:pra:mprapa:17181
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  1. Kashyap, Anil K & Stein, Jeremy C & Wilcox, David W, 1993. "Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance," American Economic Review, American Economic Association, vol. 83(1), pages 78-98, March.
  2. Tarun Khanna & Krishna Palepu, 2000. "Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups," Journal of Finance, American Finance Association, vol. 55(2), pages 867-891, 04.
  3. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  4. Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series 93-4, Board of Governors of the Federal Reserve System (U.S.).
  5. Christina D. Romer & David H. Romer, 1990. "New Evidence on the Monetary Transmission Mechanism," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 149-214.
  6. Mark R. Stone & E. P. Davis, 2004. "Corporate Financial Structure and Financial Stability," IMF Working Papers 04/124, International Monetary Fund.
  7. International Monetary Fund, 2005. "Monetary Policy and Corporate Behavior in India," IMF Working Papers 05/25, International Monetary Fund.
  8. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
  9. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
  10. Ghosh, Saibal & Sensarma, Rudra, 2004. "Does monetary policy matter for corporate governance? Firm-level evidence for India," MPRA Paper 19756, University Library of Munich, Germany.
  11. A. Ganesh-Kumar & K. Sen & R. Vaidya, 2001. "Outward Orientation, Investment and Finance Constraints: A Study of Indian Firms," Journal of Development Studies, Taylor & Francis Journals, vol. 37(4), pages 133-149.
  12. Stephen D. Oliner & Glenn D. Rudebusch, 1996. "Is there a broad credit channel for monetary policy?," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
  13. Saibal Ghosh, 2005. "Does leverage influence banks' non-performing loans? Evidence from India," Applied Economics Letters, Taylor & Francis Journals, vol. 12(15), pages 913-918.
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