Studies of Corporate Financing and Investment Behavior in India : A Survey

This survey aims to provide a review of studies of corporate financing pattern and investment behavior in India. As the development of financial system was powered by state's initiatives, a majority of the studies had examined if corporates had created excess reliance on financial institutions and thereby had a major claim on the financial resources. Most of the studies of investment behavior used three different frameworks, namely, profit, accelerator principle, and flow of funds or availability of funds. Econometric exercise used both time series and cross-sectional data. A majority of the studies covered the period prior to 1991, when the private corporate sector was subjected to several regulations and controls. With the ushering in of neoliberal policies that assigned a lead role to corporate sector in the development process of the economy since 1991, there have been significant changes with respect to firms' financing choices as well as factors underlying their investment decisions. This survey, thus, points to the need for fresh enquiry into the nexus between corporate financing and their investment decisions so as to understand two vital questions, assuming significance in the changed milieu, namely, whether financing constraints exist that may potentially check corporate investment; and whether corporate financial practices impact on the workings of financial market.