Empirical essays on development financial institutions and firm financing in India

Abstract

It has been argued in the literature that one of the primary channels through newlinewhich financial intermediaries promote economic growth is through their contribution newlineto capital accumulation of a country. In this context, development financial newlineinstitutions occupy a very important place in the Indian financial system. They form newlinethe primary source of long-term funds for fixed investment by firms in the country newlineand therefore have an important role to play in the capital formation of the country. newlineWhile these institutions were originally set up as development banks, the nature of newlinethese institutions has undergone significant changes over the years particularly with newlinethe introduction of financial reforms in India. newline newlineThis thesis examines three aspects of financing of firms by development newlinefinancial institutions in India in the nineties. First, it examines the importance of funds newlinefrom these institutions in the investment process of firms in India. Secondly, it newlineexamines the changes in the pattern of funding of firms by these institutions in the newlinenineties following financial reforms. Thirdly, it examines the motives for holding newlineequity in firms by these institutions and its implications for the performance of firms. newlineThe thesis is primarily based on data extracted from Prowess, a firm-level newlinedatabase on Indian industry compiled by the Centre for Monitoring Indian Economy. newlineData used for the analysis is an unbalanced panel of corporate sector firms from the newlinemanufacturing sector extracted from this database. newline newlineThe analysis shows that funds from development financial institutions are newlineparticularly important for firms that are more dependent on external funds for their newlineinvestment. These funds are more important for firm investment than funds from newlinebanks or capital markets in the country. The trends in the pattern of funding of firms newlineby these institutions in the post-reform period bring out two tendencies: first, there has newlinebeen a shift in funding by these institutions towards relatively large firms ( flight to newlinequality ), and secondly, relative