Determinants of Corporate Investment: Post Liberalization Panel Data Evidence from Indian Firms

MPRA Paper from University Library of Munich, Germany

Abstract: The paper models alternative investment-accelerator relationships within the neoclassical theory of Jorgenson followed by firm level panel data estimation and empirical test for other determinants of corporate investment e.g., internal liquidity, profitability, and firms’ financial strength. Athey and Laumas (1994) claimed that internal liquidity had replaced market demand in Indian firm level investment. Others indicate presence of finance constraints in Indian private sector investment activities; Kumar et al. (2001, 2002). Therefore, in the immediate aftermath of liberalization whether market demand had still not been important when availability of internal liquidity, firms’ profitability and creditworthiness are considered. We consider Indian manufacturing firms in the post-reform period of 1990s. There is significant support for the investment–accelerator relationship. Internal liquidity is relatively more important than profitability when it comes to firms’ investment decisions. There is also evidence that credit worthiness of firms to outside creditors is important for firm investment decision.

Keywords: Business fixed investment; sales accelerator; retained earnings; profitability; financial strength (search for similar items in EconPapers)
JEL-codes: D21 E22 G11 L64 (search for similar items in EconPapers)
Date: 2008-01-11
New Economics Papers: this item is included in nep-cwa and nep-mac
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Citations: View citations in EconPapers (3)

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