Investment behaviour under financial constraints: a study of Indian firms

Firms under financial constraints depend more on their internal funds when it comes to financing their investment and production activities due to a dearth of external finances. This paper conducts a study on Indian manufacturing firms for the period 2010–2019 to explore the usefulness of cash-flow sensitivity of investment as a measure of financial constraints. The study also focuses on the determinants of investment under financial constraints. Firms have been classified into financially constrained and unconstrained firms based on some a priori observable indicators, such as the prevailing uncertainty, business group affiliation, and market capitalization. The result provides evidence that the investment decision of financially constrained firms faces a higher degree of cash-flow sensitivity. Furthermore, asset tangibility is found to reduce the financial constraints of firms, thereby uplifting investments.