Financial Frictions, Underinvestment, and Investment Composition: Evidence from Indian Corporates

June 8, 2017

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Sonali Das, and Volodymyr Tulin. Financial Frictions, Underinvestment, and Investment Composition: Evidence from Indian Corporates, (USA: International Monetary Fund, 2017) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Banking, Capital adequacy requirements, Economic theory, Exports, Financial frictions, Financial institutions, Financial regulation and supervision, International trade, National accounts, Private investment, Stocks

Keywords: Capital adequacy requirements, Corporate Leverage, Exports, Financial frictions, Financial leverage, Firm, Firm investment, Global, India, Investment, Investment decision, Investment expenditure, Investment project, Investment rate, Investment slowdown, Private investment, Project length, Stocks, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/134
Stock No:

WPIEA2017134
ISBN:

9781484302644
ISSN:

1018-5941

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