The Effect of Relationships with Government-Owned Banks on Cash Flow Constraints: Evidence from India

Posted: 8 Aug 2017

See all articles by Anand Srinivasan

Anand Srinivasan

National University of Singapore - Department of Finance

Ashok Thampy

Indian Institute of Management Bangalore (IIMB)

Date Written: July 10, 2017

Abstract

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 have an investment cash flow sensitivity that is almost 30% lower relative to other firms. GOB relationships also increase sensitivity of investment to Tobin’s Q. Exclusive relationships with private banks increase cash flow sensitivity while exclusive relationships with foreign banks have no impact. The lower investment cash flow sensitivity by firms with exclusive GOB relationships is not the result of cherry picking of less constrained firms by GOBs. Rather, firms with exclusive GOB relationships are in worse financial condition relative to other firms – thus, GOBs appear to be doing reverse of cherry picking. Surprisingly, the results are driven by the large firms which benefit from GOB relationship and not the smaller firms which are the intended beneficiaries of government directed credit programs.

Keywords: banking; government owned banks; credit; cash flow; investment; India

JEL Classification: G21, G28, O16, O53

Suggested Citation

Srinivasan, Anand and Thampy, Ashok, The Effect of Relationships with Government-Owned Banks on Cash Flow Constraints: Evidence from India (July 10, 2017). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3014551

Anand Srinivasan (Contact Author)

National University of Singapore - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

Ashok Thampy

Indian Institute of Management Bangalore (IIMB) ( email )

Bannerghatta Road
Bangalore, Karnataka
India
91-80-26993280 (Phone)
91-80-26584050 (Fax)

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