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Corporate Financing and Investments under Capital Constraints: Evidences from India
Published in Serials Publications
Issue: 1-2
Pages: 95 - 120

Firms in India face varying degree of macroeconomic constraints. Most important of these constraints relate to the availability of capital and cost of funds. The paper here highlights the implicit value losses incurred by the firms in India owing to such constraints. The paper identifies systematic deleveraging for firms in India overtime, which might be responsible for the increasing tax burden on these firms. While forgoing the tax benefits of the debt tax shields, these firms do not seem to be facing distress of similar magnitude. Moreover, upon closely observing their financing patterns, one can see the reduction in external financing, both in the form of equity and debt, by these firms overtime. While the average profitability remains robust and stable, this points towards a possible underinvestment problem on account of systemic capital constraints faced by the firms. The evidence suggests that these constraints, at times, can be so severe so as to prevent firms to even restructure their capital structure in order to avoid the tax drain. Further, the underinvestment remains robust even to firms with easier access to credit i.e. larger firms. The paper also highlights the consequences of such distortions arising out of capital constraints to the growth of the firms and also to the broad economy.

About the journal
JournalIndian Development Review
PublisherSerials Publications
Open AccessNo
Concepts (5)
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    Corporate leverage
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    Corporate taxes
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    Credit market development
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    Underinvestments and capital constraints.