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Allocation of capital in the post liberalized regime: a case study of the Indian corporate sector

Listed author(s):
  • Saumitra, Bhaduri
  • Amit, Kumar

The paper investigates the prevalent trends in the allocation of capital in an emerging economy, India, during the post financial liberalization regime. In contrast to the conventional wisdom that financial liberalization leads to better allocation of funds, the study could not find any obvious evidence of increase in the efficiency over the reform period, especially during the early years of reform. Further, the study highlights the disturbing trend of convergence of efficiencies across various strata of firms towards a lower level over the reform period. The paper rationalizes the decline as a result of excessive capacity creation in certain industries, financed by cheap external sources of finance, without any consideration of return or demand conditions. The paper, as a policy recommendation, highlights the importance of creating appropriate institutions prior to pursuing financial liberalization in developing countries like India.

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File URL: https://mpra.ub.uni-muenchen.de/37999/1/MPRA_paper_37999.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37999.

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Date of creation: 10 Apr 2012
Handle: RePEc:pra:mprapa:37999
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  1. Wurgler, Jeffrey, 2000. "Financial markets and the allocation of capital," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 187-214.
  2. Carlin, Wendy & Mayer, Colin, 2003. "Finance, investment, and growth," Journal of Financial Economics, Elsevier, vol. 69(1), pages 191-226, July.
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  8. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
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  11. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1990. "The role of banks in reducing the costs of financial distress in Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 67-88, September.
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  13. 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.
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  16. Haramillo, Fidel & Schiantarelli, Fabio & Weiss, Andrew, 1996. "Capital market imperfections before and after financial liberalization: An Euler equation approach to panel data for Ecuadorian firms," Journal of Development Economics, Elsevier, vol. 51(2), pages 367-386, December.
  17. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
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  19. repec:hrv:faseco:30728041 is not listed on IDEAS
  20. Thomas Mayer, 1959. "Plant and Equiptment Lead Times," The Journal of Business, University of Chicago Press, vol. 33, pages 127-127.
  21. Haramillo, Fidel & Schiantarelli, Fabio & Weiss, Andrew, 1996. "Capital market imperfections before and after financial liberalization: An Euler equation approach to panel data for Ecuadorian firms," Journal of Development Economics, Elsevier, vol. 51(2), pages 367-386, December.
  22. K. R. Shanmugam & Saumitra Bhaduri, 2002. "Size, age and firm growth in the Indian manufacturing sector," Applied Economics Letters, Taylor & Francis Journals, vol. 9(9), pages 607-613.
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