Cash Holdings and Finance Constraints in Indian Manufacturing Firms

Abstract

This paper attempts to explore the effect of finance constraints by examining the propensity of firms to save cash out of cash flows. Drawing on cash-cash flow sensitivity (CCFS), we overcome the errors in attributing information in cash flows to real and financial components. We employ endogenous regime switching model for our empirical exercise. This model allows for multiple sorting variables, does not require finance constraints to increase monotonically with the sorting variables and enables firms to endogenously change regime over the sample period. Our findings suggest that firms portray significantly higher CCFS in the event of finance constraints.