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

Author/Editor:

Sonali Das ; Volodymyr Tulin

Publication Date:

June 8, 2017

Electronic Access:

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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.

Series:

Working Paper No. 17/134

English

Publication Date:

June 8, 2017

ISBN/ISSN:

9781484302644/1018-5941

Stock No:

WPIEA2017134

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

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