Abstract
Do firms generate financial flexibility by retiring debt? Using Indian data, we document that firms channel approximately 39% of current cash flow to repay debt. This higher debt-cash flow sensitivity facilitates firms to maintain investment in the future. Firms prioritise reducing dependency on external finance, increasing investments, and saving cash in the short run. In the long run, firms enhance investments primarily through borrowing. Unlike in developed markets, we find that Indian firms respond symmetrically to positive and negative cash flow shocks by changing their borrowing.
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