A Dynamic Panel Data Analysis: The Effect of Private Equity on Investment and Financial Constraints of Indian Companies

Abstract

The effects of private equity in the investment of firms and investment cash-flow sensitivity have long been debated. This paper analyzes the impact of private equity on the investment level of Indian firms and on investment cash-flow sensitivities. Endogeneity of private equity transactions and unobserved heterogeneity have been considered using dynamic panel data techniques. The paper covers listed companies backed by private equity during the 10 years from 2005-2014. In India, we found that private equity investment increases the investment level as well as the investment cash-flow sensitivity of the firms. The relation between investment cash-flow sensitivity and financial constraints is also discussed.