Investment - Cash Flow Sensitivity and Financing Constraints: New Evidence from Indian Business Group Firms

Abstract

A controversy exists on the use of the investment – cash flow sensitivity as a measure of financing constraints of firms. We re-examine this controversy by analyzing firms affiliated to Indian business groups. We find a strong investment – cash flow sensitivity for both group-affiliated and independent firms, but no significant difference in the sensitivity between them. Additional tests consistently demonstrate that investment – cash flow sensitivity of Indian group affiliated firms is not significantly lower relative to unaffiliated firms.

Keywords: investment, cash flows, business groups, financing constraints, India

JEL Classification: G30, G31, L20