Cash Holdings and Finance Constraints in Indian Manufacturing Firms

Vikash Gautam, Ashish Singh, Sarthak Gaurav

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.


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DOI: https://doi.org/10.5296/rae.v6i3.5621

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