Are listed Indian firms finance constrained: Evidence for 1991-92 to 1997-98

Bagchi, A. K. and Das, Pranab Kumar and Moitra, B. (2002): Are listed Indian firms finance constrained: Evidence for 1991-92 to 1997-98. Published in: Economic and Political Weekly , Vol. 37, No. 8 (23 February 2002): pp. 727-736.

Abstract

We formulate a simultaneous equations model and with the data of a panel of 600 Indian firms for the period 1991-92 to 1997-98 test the hypothesis of finance constraint. The firms are classified by the dividend pay-out ratio into high-cost and low-cost groups; a high dividend pay-out ratio implies a low cost of information faced by the firms and vice versa. In the context of developed countries, earlier researchers found that the firms in the high-cost group shows evidence of finance constraints and severity of the constraint goes down with the decrease in the cost of information. In our study we found that the firms with medium dividend pay-out ratios are constrained in the loans market so far as investment in fixed capital is concerned. This is quite a surprising result that requires careful explanation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Investment, Credit Rationing, Imperfect Information, Fixed Capital, Working Capital
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; D - Microeconomics > D9 - Intertemporal Choice > D92 - Intertemporal Firm Choice, Investment, Capacity, and Financing; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development

References

Auerbach, Alan J (1979): ‘Wealth Maximisation and the Cost of Capital’, Quarterly Journal of Economics, 94(3), pp 443-56.

Bagchi, A K (1962): ‘Investment by Privately Owned Joint Stock Companies in India’,Arthaniti (July).

– (1963): ‘Private Investment in a Partially Planned Economy’, unpublished PhD thesis, University of Cambridge.

Baltagi, Badi H (1995): Econometric Analysis of Panel Data, John Wiley, Chichester.

Bond, Stephen and Costas Meghir (1994): ‘Dynamic Investment Models and Firm’s Financial Policy’, Review of Economic Studies,61(2), pp 233-58.

Bradford, David F (1981): ‘The Incidence and Allocation of a Tax on Corporate Distributions’, Journal of Public Economics, 15 (1), pp 1-22.

Brainard, W C and J Tobin (1968): ‘Pitfalls in Financial Model Building’, American Economic Review, 58, 2, 99-122.

Calomiris, Charles W and Hubbard R Glenn (1990): ‘Firm Heterogeneity, Internal Finance,and Credit Rationing’, Economic Journal, 100(1), pp 90-104.

Chirinko, Robert S (1993): ‘Business Fixed Investment Spending: A Critical Survey of Modelling Strategies, Empirical Results, and Policy Implications’, Journal of Economic Literature, 31(4), pp 1875-1911.

Das, Pranab Kumar (1996): ‘Stochastic Rationing of Credit and Economic Activities in a Model of Monopolistic Competition’, Occasional Paper No 154, Centre for Studies in Social Science, Calcutta.

Desai, M J (1973): ‘Macroeconometric Models for India’, Sankhya, Series B, Vol 35, Part II.

Devereux, Michal and Fabio Schiantarelli (1990): ‘Investment, Financial Factors, and Cash Flow: Evidence from UK Panel Data’ in Glenn Hubard (ed), Asymmetric Information Information, Corporate Finance, and Investment, University of Chicago Press,Chicago.

Dewing, A S (1941): The Financial Policy of Corporations (4th ed), The Ronald Press,New York.

Fazzari, Steven M, Hubbard, R Glenn and Bruce C Petersen (1988): ‘Financing Constraints and Corporate Investment’, Brookings Papers on Economic Activities, pp 141-95.

Fazzari, Steven M and Bruce C Petersen (1993): ‘Working Capital and Fixed Investment: New Evidence on Financing Constraints’, RAND Journal of Economics, 24(4), 328-41.

Froot, Kenneth A, David S Scharfstein and Jeremy C Stein (1993): ‘Risk Management: Coordinating Corporate Investment and Financing Policies’, Journal of Finance, 48(5), pp 629-58.

Gertner, Robert H, David S Scharfstein and Jeremy C Stein (1994): ‘Internal versus External Capital Markets’, Quarterly Journal of Economics, 109(4), pp 1211-30.

Ganesh-Kumar, A, K Sen and R R Vaidya (2001):‘Outward Orientation, Investment and Finance Constraints: A Study of Indian Firms’, Journal of Development Studies, 37, 4, pp 133-49.

Gilchrist, Simon and Charles P Himmelberg (1995): ‘Evidence on the Role of Cash Flow in Reduced-Form Investment Equations’,Journal of Monetary Economics, 36, pp 541-72.

Hall, Robert and D W Jorgenson (1967): ‘Tax Policy and Investment Behaviour’, AmericanEconomic Review, 57, pp 91-414.

Hubbard,R Glenn, Anil K Kashyap and Toni M Whited (1995): ‘Internal Finance and Firm Investment’, Journal of Money, Credit, and Banking, 27(4), pp 683-701.

Hubbard, R Glenn (1997): ‘Capital Market Imperfection and Investment’, NBER Working Paper No 5996.

Jaffee, D and T Russel (1976): ‘Imperfect Information and Credit Rationing’, Quarterly Journal of Economics, 90(4), pp 651-66.

Kalecki, M (1937): ‘The Principle of Increasing Risk’, Economica, reprinted as ‘Entrepreneurial Capital and Investment', Chapter 8 in Kalecki (1954).

– (1954): Theory of Economic Dynamics, Allen and Urwin, London.

Kaplan, Steven N and Luigi Zingales (1997): ‘Do Financing Constraint Explain Why Investment Is Correlated With Cash Flow?’, Quarterly Journal of Economics, 112(1), pp 565-92.

Keynes, J M (1936): The General Theory of Employment, Interest and Money, Macmillan,London.

– (1939): ‘Professor Tinbergen’s Method’, [Review of Tinbergen (1939)],Economic Journal,September, Reprinted in Keynes (1973), pp 306-17.

– (1940): ‘On a Method of Statistical Research: Comment’, Economic Journal, March, Reprinted in Keynes (1973), pp 318-20.

– (1973): The Collected Writings of John Maynard Keynes, Vol XIV, The General Theory and After: Defence and Development, London Macmillan for the Royal Economic Society.

King, Mervyn (1977): Public Policy and the Corporation, Chapman and Hall, London.

King, Robert G, and Ross Lavine (1993): ‘Finance and Growth: Schumpeter Might Be Right’, Quarterly Journal of Economics, 108(3), pp 717-37.

Krishnamurty, K (1964): ‘Private Investment Behaviour in India: A Macro Time Series Study’, Arthaniti, January.

Krishnamurty, K and D U Sastry (1971): ‘Some Aspects of Corporate Behaviour in India – A Cross-Section Analysis of Investment, Dividends and External Finance for the Chemical Industry, 1962-67’, Indian Economic Review, October.

– (1975): Investment and Financing in the Corporate Sector in India, Tata McGraw-Hill, New Delhi.

Lamont, Owen A (1997): ‘Cash Flow and Investment: Evidence from Internal Capital Markets’, Journal of Finance, 52(1), pp 83-110.

Lucas, Robert E Jr (1967): ‘Adjustment Costs and the Theory of Supply’, Journal of Political Economy, 75, pp 321-34.

McKinon, R I (1973): ‘Money and Capital in Economic Development’, The Brookings Institution, Washington DC.

Meltzer, A H (1960): ‘Mercantile Credit, Monetary Policy, and Size of Firms’, Review of Economics and Statistics,Vol 42, pp 429-37.

Meyer, J R and E Kuh (1957): The Investment Decision, Harvard University Press, Cambridge, Mass.

Modigliani, F and M Miller (1958): ‘The Cost of Capital, Corporation Finance and the Theory of Investment’, American Economic Review, 48, pp 261-97.

Myres, S C and N S Majluf (1984): ‘Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have’, Journal of Financial Economics, Vol 13, pp 187-221.

Rakshit, Mihir (1987): ‘Monetary Policy in a Developing Economy’, Working Paper, Centre for Economic Studies, Presidency College, Calcutta.

– (1989): ‘Towards an Integration of Monetary and Real Models for Mixed Economies’, Working Paper, Centre for Economic Studies, Presidency College, Calcutta.

Shaw, E S (1973): Financial Deepening in Economic Development, OUP: NY and London.

Stiglitz, Joseph E. and Andrew Weiss (1981): ‘Credit Rationing in Markets with Imperfect Information’, American Economic Review, 71(3), pp 393-410.

Tinbergen, J (1939): A Method and its Application to Investment Activity, League of Nations, Geneva.

– (1940): ‘On a Method of Statistical Research: Reply’, Economic Journal, 50, March, pp 141-54.

Tobin, J (1969): ‘A General Equilibrium Approach to Monetary Theory’, Journal of Money Credit and Banking, 1, February, pp 15-29.

Whited, Tony M (1992): ‘Debt, Liquidity Constraint, and Corporate Investment: Evidence from Panel Data’, Journal of Finance, 47(4), pp 1425-60.

Williamson, S J (1987): ‘Recent Developments in Modelling Financial Intermediation’, Federal Reserve Bank of Minneapolis Quarterly Review (Summer), pp 19-29.