The impact of macroeconomic condition on investment-cash flow sensitivity of Indian firms

Abstract

PurposeThe purpose of this paper is to investigate the impact of the macroeconomic condition on investment-cash flow sensitivity (ICFS) of Indian firms and examine whether the effect of macroeconomic condition on ICFS depends on the size and group affiliation of the firm.Design/methodology/approachAn empirical investigation is conducted using a dynamic panel data model or more specifically system generalized method of moments (GMM) estimation technique.FindingsEmpirical findings postulate that the availability of cash flow influences the investment decisions which depicts that Indian manufacturing firms are internally as well as externally financially constrained. This study finds that good economic condition (period of high GDP growth rate) reduces the ICFS, although this effect is stronger for small-sized and standalone firms than the large-sized and business group affiliated firms. The authors find that macroeconomic condition has a positive and significant effect on investment decisions.Research limitations/implicationsThis study has considered only the non-financial sector. The future research could explore the effect of macroeconomic condition on ICFS might be affected by firm other characteristics such as firm age and firm capital structure.Social implicationsThe government should provide loan on the low rate to the small-sized firms and standalone firms because it is very difficult for these firms to finance their investment during the bad economic condition (period of low high GDP growth rate).Originality/valueThis study contributes to the existing literature by analyzing the impact of the macroeconomic condition on ICFS as well as investment decisions of the Indian manufacturing firms, which is an unexplored issue from an emerging market perspective. To the best of my knowledge, this is a first-ever study which explores the effect of macroeconomic condition on investment decisions with respect to business group affiliation and firm size.