Essays on financing frictions and demand for external finance

Abstract

In this dissertation we look at three broad aspects for the Indian firms First we analyse the financing behaviour of the financially constrained and unconstrained non financial firms in the Indian context We find that given the profitability the financially constrained firms show more complementarity behaviour as compared to the unconstrained firms Second we analyse how SARFAESI Act affects the demand of debt financing for Indian non financial firms Results suggest that as loan recovery became more easy demand for debt increased But this increase in demand did not lead to investment but led to precautionary savings Third we document what factors drive the choice of debt for the Indian firms Apart from these three studies related to the Indian firms the dissertation also looks how the country specific factors governance institutional factors financial market development factors and macroeconomic factors affect the demand of firm 8217 s debt financing through a cross country study In the first essay we analyse the interplay between the available internal funds and the demand for external finance for firms in India which face financing frictions or credit market frictions While increase in creditor rights protection affects the supply side of external finance the essay looks at the demand side of such external finance particularly in the presence of financing frictions This essay intends to augment the work of Almeida and Campello 2010 in India an emerging market employing various measures to segregate firms which face high and low financing frictions Results suggest that there is a more positive more complementarity relationship between the internal funds and demand for external finance for financially constrained firms as compared to the financially unconstrained firms In our opinion the findings have key impact on issues like development of bond and equity markets in India rethinking loan strategies by banks and the regulatory measures to be taken by regulators newline newline