Investment Under Uncertainty and Capital Market Imperfection by Indian Manufacturing Firms

Posted: 28 Aug 2013

See all articles by Vikash Gautam

Vikash Gautam

Indira Gandhi Institute of Development Research (IGIDR)

Vikash Vaibhav

Indira Gandhi Institute of Development Research (IGIDR)

Date Written: August 27, 2013

Abstract

This paper examines the role of uncertainty and capital market imperfection in influencing firm investment. Introduction of uncertainty in the investment model allows for limited expandability and limited reversibility of capital over time other than what is dictated by firm’s fundamentals and financial condition. It is represented by employing two variables – volatility in gold prices and dispersion in the market share of top four firms in each 5-digit National Industrial Classification group. We identify financially constrained firms in various years by relying on investment-asset sale sensitivity. Using an endogenous regime switching model, for a sample of 1933 Indian manufacturing firms from 1994 to 2009, our results show that asset sales are a significant determinant of investment for the constrained firms. Among uncertainty measures, higher volatility in gold prices depresses investment whereas market share dispersion has no impact on the timing of investment for both constrained and unconstrained firms.

Keywords: uncertainty, capital market imperfection, firm investment, endogenous regime switching model

JEL Classification: D21, D82, G32

Suggested Citation

Gautam, Vikash and Vaibhav, Vikash, Investment Under Uncertainty and Capital Market Imperfection by Indian Manufacturing Firms (August 27, 2013). Available at SSRN: https://ssrn.com/abstract=2316975

Vikash Gautam (Contact Author)

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India

Vikash Vaibhav

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
363
PlumX Metrics