Skip to main content Accessibility help
×
Hostname: page-component-78c5997874-t5tsf Total loading time: 0 Render date: 2024-11-05T16:30:10.723Z Has data issue: false hasContentIssue false

Chapter 13 - Financing Structure and Growth: A Study of Firms in the Indian Private Corporate Sector

from Section 5 - Emerging issues in growth: The labour and capital markets

Published online by Cambridge University Press:  18 December 2015

Prabhakaran Nair
Affiliation:
Sanatana Dharma College, Alappuzha, Kerala
Pradeep Agrawal
Affiliation:
Institute of Economic Growth, Delhi
Get access

Summary

INTRODUCTION

Issues regarding the interface between corporate financial structure and corporate growth have gained prominence in the recent years, especially in the context of the fast changing institutional framework in the financial markets in many countries. More importantly, the institutional set-up within corporate houses operated in the regulated era has undergone substantial transformation over the last two decades. The move toward market-driven allocation of resources, coupled with the widening and deepening of financial markets, including the capital market, and the stringent disclosure and transparency practices consequent upon initial public offerings, have provided greater scope for the corporates to determine their financing structure and introduce better growth enhancing practices. A fast growing literature has analysed the relationship between financial structure and corporate growth [see among others, Fazzari et al. (1988), Whited (1992), Rajan and Zingales (1988) Devereux and Schiantarelli (1989) Hoshi et al. (1991) Mills et al. (1994)]. For instance, Fazzari et al. (1988) have empirically shown that while capital market informational problems arise at the level of the firm, financial constraints have a clear macroeconomic dimension because fluctuations in firms' cash flow and liquidity are correlated with movements of the aggregate economy over the business cycle, and that in general unlike the neoclassical investment theory, financial factors do affect investment decisions. In other words, according to the financial constraints hypothesis by Fazzari et al. (1988), financial structure of firms in terms of cash flow and debt affects investment when there exists a wedge between the costs of internal and external finance in an imperfect financial market. The question of the financing choice of firms is critical in this regard because the cost of capital and hence the value of a firm depends upon its debt-equity mix (Pagano 1993).

A large volume of research has tested this hypothesis by focusing on the sensitivity of cash flow on firms' investment and growth [see, among others, Devereux and Schiantarelli (1989) Hoshi et al. (1991) Mills et al. (1994)], Bond et al. (2003), Fagiollo and Luzzi (2006) Harris et al. (1994)].

Type
Chapter
Information
Publisher: Cambridge University Press
Print publication year: 2015

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Save book to Kindle

To save this book to your Kindle, first ensure coreplatform@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×