Financial Frictions, Underinvestment, and Investment Composition: Evidence from Indian Corporates
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Summary:
This paper studies private investment in India against the backdrop of a significant investment decline over the past decade. We analyze the potential causes of weaker investment at the firm level, using both firm-level financial statements and a novel dataset on firms’ investment project decisions, and find that financial frictions have played a role in the slowdown. Firms with higher financial leverage invest less, as do firms with lower earnings relative to their interest expenses. Consistent with the notion of credit constraints leading to pro-cyclical investment, we also find that firms with higher leverage are (i) less likely to undertake new investment projects, (ii) less likely to complete investment projects once begun, and (iii) undertake shorter-term investment projects.
Series:
Working Paper No. 2017/134
Subject:
Banking Capital adequacy requirements Economic theory Exports Financial frictions Financial institutions Financial regulation and supervision International trade National accounts Private investment Stocks
English
Publication Date:
June 8, 2017
ISBN/ISSN:
9781484302644/1018-5941
Stock No:
WPIEA2017134
Pages:
32
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