Firm Investment and Credit Constraints in India, 1997-2006: A Stochastic Frontier Approach

Posted: 19 Feb 2011

See all articles by Sumon K. Bhaumik

Sumon K. Bhaumik

Aston University - Aston Business School; Institute for the Study of Labor (IZA); University of Michigan at Ann Arbor - Stephen M. Ross School of Business, William Davidson Institute

Pranab Kumar Das

Centre for Studies in Social Sciences, Calcutta

Subal C. Kumbhakar

State University of New York (SUNY) at Binghamton - Department of Economics

Date Written: January 18, 2011

Abstract

We use the stochastic frontier approach to estimate the impact of firm characteristics on investment decisions of Indian firms during the 1997-2006 period. The use of the stochastic frontier approach allows us to define the (unobserved) optimum investment that is consistent with a firm's characteristics such as the Tobin's q during each firm-year, and then estimate the deviation from this unobserved optimum in the form of an (investment) efficiency score that varies between zero and one. This deviation is interpreted as the degree of credit constraint, and we are also able to estimate the impact of firm characteristics such as leverage and business group affiliation on the degree of credit constraint via their marginal effects. Our results suggest that the degree of credit constraint of an average firm increased over time during the sample period, despite significant reforms of the Indian banking sector by the turn of the century. We also find that the degree of credit constraint decreases with cash flow and assets, which is consistent with the available literature. Further, there is a threshold effect of leverage, and the degree of credit constraint is greater for highly leveraged firms. Finally, we find that the beneficial impact of business group affiliation on the degree of credit constraint decreases over time, and is eliminated by the end of the sample period.

Keywords: Investment, Credit Rationing, Imperfect Information, Stochastic Frontier Analysis

JEL Classification: C23, C24, D82, D92, G31, G32

Suggested Citation

Bhaumik, Sumon K. and Das, Pranab Kumar and Kumbhakar, Subal C., Firm Investment and Credit Constraints in India, 1997-2006: A Stochastic Frontier Approach (January 18, 2011). William Davidson Institute Working Paper No. 1010. Available at SSRN: https://ssrn.com/abstract=1763885

Sumon K. Bhaumik (Contact Author)

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, West Midlands B47ET
United Kingdom

Institute for the Study of Labor (IZA) ( email )

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

University of Michigan at Ann Arbor - Stephen M. Ross School of Business, William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

Pranab Kumar Das

Centre for Studies in Social Sciences, Calcutta ( email )

R 1, B.P. Township
Kolkata, West Bengal, India
Kolkata, West Bengal 700094
India
913324627252 (Phone)
913324626183 (Fax)

HOME PAGE: http://http//www.cssscal.org/

Subal C. Kumbhakar

State University of New York (SUNY) at Binghamton - Department of Economics ( email )

Binghamton, NY 13902-6000
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
385
PlumX Metrics