The impact of macroeconomic condition on investment-cash flow sensitivity of Indian firms

Abstract

Purpose The purpose of this paper is to investigate the impact of the macroeconomic condition on investment-cash flow sensitivity (ICFS) of Indian firms and examine whether the effect of macroeconomic condition on ICFS depends on the size and group affiliation of the firm. Design/methodology/approach An empirical investigation is conducted using a dynamic panel data model or more specifically system generalized method of moments (GMM) estimation technique. Findings Empirical findings postulate that the availability of cash flow influences the investment decisions which depicts that Indian manufacturing firms are internally as well as externally financially constrained. This study finds that good economic condition (period of high GDP growth rate) reduces the ICFS, although this effect is stronger for small-sized and standalone firms than the large-sized and business group affiliated firms. The authors find that macroeconomic condition has a positive and significant effect on investment decisions. Research limitations/implications This study has considered only the non-financial sector. The future research could explore the effect of macroeconomic condition on ICFS might be affected by firm other characteristics such as firm age and firm capital structure. Social implications The government should provide loan on the low rate to the small-sized firms and standalone firms because it is very difficult for these firms to finance their investment during the bad economic condition (period of low high GDP growth rate). Originality/value This study contributes to the existing literature by analyzing the impact of the macroeconomic condition on ICFS as well as investment decisions of the Indian manufacturing firms, which is an unexplored issue from an emerging market perspective. To the best of my knowledge, this is a first-ever study which explores the effect of macroeconomic condition on investment decisions with respect to business group affiliation and firm size.

CEO's education and investment–cash flow sensitivity: an empirical investigation

“…Following Love (2003), Laeven (2003), Ratti et al (2008), Cris ostomo et al (2014, Samet and Jarboui (2017), Ahiadorme et al (2018) and Gupta and Mahakud (2019), this paper uses the Q model and the Euler equation of investment. We use a system-GMM estimator proposed by Arellano and Bover (1995) and augmented by Blundell and Bond (1998).…”

“…This study also suggests that investment expenditures of firms display a greater sensitivity to cash flow in the crisis period. A study conducted by Gupta and Mahakud (2019) finds that availability of cash flow influences the investment decisions which depicts that Indian manufacturing firms are financially constrained. Their study also infers that good economic condition reduces the ICFS and this effect is stronger for small-sized and stand-alone firms.…”

“…Vijayanagara and Hosamane (2015) explain that behavior of investment delivers a main understanding into the process of economic growth, where economic development critically depends on capital accumulation and it stems from investment with the idea that "industrial investment makes countries richer." Gupta and Mahakud (2019) reveal that Indian manufacturing firms are financially constrained. Therefore, it is more important for the manufacturing firms to increase their investment by external financing.…”

CEO's age and investment‐cash flow sensitivity

“…On the other hand, the empirical literature on ICFS has received major attention (Fazzari et al, 1988; Gochoco‐Bautista et al, 2014; Gupta, 2021; Gupta et al, 2021; Gupta & Mahakud, 2019, 2020; Lin, 2007; Salehi et al, 2018). It has been documented that ICFS would be highly robust for firms that encounter excessive pledges between internal and external costs (Fazzari et al, 1988); therefore, these firms are considered highly financially constrained firms.…”

“…Further, Salehi et al (2018) demonstrate a positive link between external (bank) debt financing and managerial access and earnings quality after adjusting firm‐specific variables. Gupta and Mahakud (2020) demonstrate that macroeconomic conditions are persistent for financially constrained firms in India.…”