Asian Journal of Management

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Financing of Corporate Investment:Panel Data Evidence from Indian Manufacturing Firms


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1 Department of Commerce, Lakshmibai College, University of Delhi, India
     

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The significance of financing variables in determining corporate investment has been of substantial interest for researchers. With market imperfections being a reality, it is necessary for the firms to consider various financing options while making investment decisions. The objective of this paper is to empirically evaluate the importance of various sources of finance in determining the investment equation in manufacturing firms from public and private sector in India. Accelerator- cash flow model has been used as the basic model of analysis with output and internal funds to be the most significant factors explaining investment in Indian corporate sector. Panel data model with balanced dataset has been estimated for a sample of 176 large sized Indian companies for fourteen-year period. Apart from change in output and cash flow from operating activities, the investment equation also includes change in inventory, flow of equity, and flow of borrowings along with lagged investment and lagged change in output as independent variables. Though inclusion of cash flows as an explanatory variable in capital expenditure equation has both theoretical and empirical support, the positive sign of equity is postulated to study the impact of financial sector reforms post nineties which were aimed at broadening of equity market by removing control over capital issues and pricing. There is evidence that accelerator theory of investment plays a determining role in firm’s fixed investment behavior as change in output (both, current and lagged) has been found to be statistically significant. Both internal and external sources of finance have been dynamically affecting investment with flow of borrowings being a highly significant variable indicating the predominant role of banks and other development financial institutions in Indian financial system apart from debentures raised from public at large. In a response to this, changes in corporate financing pattern have been observed with a movement towards greater equity financing. Finally, change in output, cash flows, flow of equity and borrowings have been statistically significant in determining corporate investment.

Keywords

Corporate Investment, Cash Flows, Equity, Borrowed Funds, Accelerator Theory.
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  • Financing of Corporate Investment:Panel Data Evidence from Indian Manufacturing Firms

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Authors

Sucheta Gauba
Department of Commerce, Lakshmibai College, University of Delhi, India

Abstract


The significance of financing variables in determining corporate investment has been of substantial interest for researchers. With market imperfections being a reality, it is necessary for the firms to consider various financing options while making investment decisions. The objective of this paper is to empirically evaluate the importance of various sources of finance in determining the investment equation in manufacturing firms from public and private sector in India. Accelerator- cash flow model has been used as the basic model of analysis with output and internal funds to be the most significant factors explaining investment in Indian corporate sector. Panel data model with balanced dataset has been estimated for a sample of 176 large sized Indian companies for fourteen-year period. Apart from change in output and cash flow from operating activities, the investment equation also includes change in inventory, flow of equity, and flow of borrowings along with lagged investment and lagged change in output as independent variables. Though inclusion of cash flows as an explanatory variable in capital expenditure equation has both theoretical and empirical support, the positive sign of equity is postulated to study the impact of financial sector reforms post nineties which were aimed at broadening of equity market by removing control over capital issues and pricing. There is evidence that accelerator theory of investment plays a determining role in firm’s fixed investment behavior as change in output (both, current and lagged) has been found to be statistically significant. Both internal and external sources of finance have been dynamically affecting investment with flow of borrowings being a highly significant variable indicating the predominant role of banks and other development financial institutions in Indian financial system apart from debentures raised from public at large. In a response to this, changes in corporate financing pattern have been observed with a movement towards greater equity financing. Finally, change in output, cash flows, flow of equity and borrowings have been statistically significant in determining corporate investment.

Keywords


Corporate Investment, Cash Flows, Equity, Borrowed Funds, Accelerator Theory.

References