The effect of relationships with government owned banks on cash flow constraints: evidence from India
Description
We examine the effect of maintaining exclusive relationships with government-owned banks (GOBs) on real investment by publicly traded companies in India. Firms that maintain such exclusive relationships exhibit investment–cash flow sensitivity that is nearly 30 percent lower relative to other firms. GOB relationships also increase the sensitivity of investment to Tobin’s Q. In contrast, exclusive relationships with private banks increase cash flow sensitivity, while exclusive relationships with foreign banks have no significant impact. The lower investment–cash flow sensitivity observed in firms with exclusive GOB relationships is not the result of cherry-picking less-constrained firms by GOBs. Rather, firms with such exclusive relationships are in a weaker financial condition compared to other firms—suggesting that GOBs may, in fact, be engaging in the reverse of cherry-picking. Interestingly, these results are primarily driven by large firms that benefit from GOB relationships, rather than smaller firms, which are the intended beneficiaries of government-directed credit programs.
Copyright Date
January 2015
Publication Date
1-1-2015
Keywords
Banking, Government owned banks, Credit, Cash flow, Investment, India
Conference
19th November, 2015, European Business School, Weisbaden, Germany
