The effect of relationships with government-owned banks on cash flow constraints: Evidence from India

Srinivasan, Anand; Thampy, Ashok

doi:10.1016/j.jcorpfin.2017.07.007

Cited by 20 publications

(22 citation statements)

References 30 publications

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Section: Econometric Methodologymentioning

confidence: 99%

“…This section describes the methodology used to measure financing constraints among Indian firms with and without foreign currency borrowing. A similar methodology is used for measuring firms' cash flow constraints as employed by earlier studies, such as Fazzari et al (1988), Ghosh (2006), George et al (2011) and Srinivasan and Thampy (2017). Firms' investment is regressed on the Tobin's Q (an indicator of future growth opportunities) and internal cash flows, while controlling for firms' characteristics and industry-specific time-varying shocks.…”

Section: Econometric Methodologymentioning

confidence: 99%

“…Ghosh (2006) uses a panel dataset of listed Indian manufacturing firms for the 1995-2004 period to show that financial liberalization led to a significant easing of financing constraints for Indian firms. Srinivasan and Thampy (2017) analyze banking relationships and cash flow sensitivity of investment using a sample of listed non-financial Indian firms. They find that firms with exclusive banking relationships with government-owned banks, in general, have lower investment cash flow sensitivity than firms with relationships with foreign or private banks.…”

Section: Financing Constraints and Investmentmentioning

confidence: 99%

“…In this section, we consider how firms' choice of banking relationships and foreign currency borrowings are related to their cash flow sensitivity of investment. An earlier study finds that firms enjoying exclusive relationships with government-owned banks, in general, have lower cash flow sensitivity of investment than those with a banking relationship with at least one domestic or private sector bank (Srinivasan and Thampy, 2017). Additionally, foreign-owned banks may prefer lending in foreign currency because they have easier access to foreign currency funds (Basso et al, 2011).…”

Section: Banking Relationship Foreign Currency Borrowing and Financing Constraintsmentioning

confidence: 99%

“…NIC 2-digit industry and year dummy interactions are included in all specifications. * indicates significance at 10% level, ** significance at 5% level and *** significance at 1% level that firms enjoying exclusive relationships with GOB, in general, have lower cash flow sensitivity of investment than those with a banking relationship with at least one domestic or private sector bank (Srinivasan and Thampy, 2017). Additionally, FOB may prefer lending in foreign currency because they have easier access to foreign currency funds (Basso et al, 2011).…”

Section: Note(s)mentioning

confidence: 99%

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Foreign currency borrowing and firm financing constraints in emerging markets: evidence from India

Mohapatra

Nagar²

2020

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PurposeFirst, the purpose of this study is to examine the relationship between foreign-currency debt and firms' financing constraints for India, the second-largest emerging market economy after China. Second, this study provides insights into how firms' financing constraints evolve prior to, during and after foreign currency borrowing. Third, it demonstrates the extent to which banks' ownership status and firms' characteristics influence the relationship between foreign currency borrowing and firms' financing constraints.Design/methodology/approachThis study uses detailed balance sheet data for 2,512 nonfinancial listed firms in India for the 1996–2016 period to provide new evidence on the relationship between foreign currency borrowing and firms' financing constraints. This study uses a well-known measure of firms' financing constraints, the sensitivity of investment to internal cash flows (Fazzari et al., 1988, 2000; Hubbard, 1999; Love, 2003).FindingsFinancing constraints tend to be higher for firms with foreign currency debt exposure compared to other firms. Financing constraints are higher prior to new foreign currency borrowing (FCB), but decrease subsequently. Firms that have relationships with privately owned banks or foreign banks have higher financing constraints when undertaking new FCB than those with exclusive relationships with government-owned banks. Financing constraints for firms with FCB are higher during domestic credit booms than other periods. Nonmanufacturing firms and those with lower than median export revenues and higher than median tangible assets experience greater financing constraints compared to other firms when they undertake FCB.Originality/valueThe findings of this study suggest that although firms which borrow in foreign currencies are initially more financially constrained than other firms, the foreign currency borrowing reduces their financing constraints. The findings on how global and domestic macroeconomic conditions and firm-specific characteristics influence the relationship between financing constraints and foreign currency borrowing can provide directions for policy to better leverage the benefits of international financial integration.

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