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We are grateful to Paul Cashin, Kenneth Kang, Arvind Subramanian, Adrian Alter, Dan Nyberg, Jeffrey Williams and our colleagues in the IMF Asia and Pacific Department for helpful comments and discussions. We also benefited from feedback received from seminar participants at the Reserve Bank of India and the Indian Institute of Management Calcutta.
Indian fiscal years run from April 1 to March 31. That is, 2007/08 is from April 1, 2007 to March 31, 2008.
Tobin (1969) introduced “Q”, the ratio of the market value of a firm to the replacement cost of its capital stock, as a measure of its incentive to invest in capital.
For example, early papers using data on U.S. firms showed that investment is excessively correlated with cash flow (Lang, Ofek, and Stulz 1996) and ensured that this holds beyond any role that cash flow may have as an indicator of investment opportunities (Gilchrist and Himmelberg 1995). Subsequent papers have taken a variety of approaches to deal with the potential endogeneity stemming from cash or other financing variables containing information about investment opportunities.
Hayashi (1982) and Abel and Eberly (1994) provided formal justification for this practice, deriving conditions under which average Q and marginal q are equal. Both models, however, preclude any role for financial structure by assuming that the firm is financed exclusively with equity.
The average time between project announcement and completion is about 2 years in manufacturing, 3.5 years in the services sector, which covers investments related to transportation and communications infrastructure, and about 4 years in the electricity sector.
The variable is constructed for 36 product groups (2-digit SITC Rev.3 classification) and matched to the firm according to the firm’s main product group, that is product group from which the company gets more than half of its revenue. It covers 49 countries which account for over 90 percent of India’s exports. The volume indices are based on product-specific international market prices for commodities and primary products and the U.S. import price indices for other products. For further details, see Raissi and Tulin (2015).
Equity and debt raised from private sources including group companies, promoters and founders, trade credits, and other liabilities.
For a subset of the firm sample, where this breakdown of bank debt into short and long term is available.