Does the source of financing matter? Financial markets, financial intermediaries and investment in India

This paper extends the literature on finance and investment by examining the source of finance constraints on the firm's investment decisions. Using a panel of 714 Indian manufacturing firms for the period 1993-98, we find that the degree of 'finance constraint' differs significantly across external suppliers of funds with investments being most sensitive to borrowings from development finance institutions (DFIs) and considerably less sensitive to funds from capital markets and commercial banks. Capital markets and commercial banks seem to use outward orientation as a signal of the firm's ability to succeed whereas DFIs do not seem to have adopted such a criterion. Copyright © 2002 John Wiley & Sons, Ltd.