Abstract

Objectives: The study investigates the sources of investment financing and easiness of raising external funds through capital market by Indian manufacturing firms after economic reforms.

Methods: A balanced panel of 180 Indian private sector manufacturing firms operating in different areas and producing a wide range of products is chosen from listed BSE-500 firms and divided into four categories by developing a composite index. “Augmented Sales Accelerator” equation has been employed and estimated by Panel data regression technique. Second Stage Least Squires (2SLS) method is used to avoid measurement error and endogeneity problems.

Findings: The result indicates a wide difference between various categories of firms with respect to asset size and financing pattern. As compared to all firms the average cash flow sensitivity is very high for smaller firms (0.49) particularly during 1990s which reflects reliance on internal funds and difficulty in raising external funds for investment projects. Sales income seems to be highly significant for larger firms and borrowings from external sources are important for all categories of firms in investment financing. The overall finding demonstrates that old, experienced and large firms have easy access of external funds from the capital market and thus, less reliant on internal funds while smaller firms are not. There is indication that due to various reform measures in financial market over the period of time, the capital market constraint is declining which is evident from reduced investment cash flow sensitivity for smaller firms since year 2001 onwards.

Application: This study used advanced methodology for analysis and takes into account the balance sheet of only private manufacturing firms which are not subject to financing through government budgetary provisions.

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