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Studies of Corporate Financing and Investment Behavior in India: A Surveymore by Dennis Rajakumar 29 Download (.pdf)
21Studies of Corporate Financing and Investment Behavior in India: A Survey
these variables, say investment and profits, was not found, security prices affected
investment.Whenever security prices did not affect investment, profit affected investment. The role of government policies was also noted, particularly during 1960-1963, when
corporateinvestment was influenced by the state’s priority for modernization and renovation of theseindustries.By adding interest rates in the same model and using RBI statistics, Sarkar (1970)
examineddeterminants of corporate investment in industries, such as cotton textiles, engineering,sugar, cements and tea, which accounted for a larger weight for the period from 1950 to 1965.As
data on rate of interest could not be obtained industry-wise, variable dividend of industrialsecurities was used. Comparing the influence of changes in sales and profit (with a lag of one year), he argued
that private investment was crucially affected by PAT and changes in saleshad much less influence on the level of investment, except in engineering industries.As regards cotton textiles and
cement industries, interest rate had influenced investment,but in engineering industries, its effect was of the same degree as that of rate of profits. He alsoconsidered the
joint effect of both profits and security prices, and found that fall in profit inone year was covered up by a rise in security prices. He also attempted to capture the effect of profit after tax and changes
in sales through distributed lag model.
12
Even then, as shown bythe regression results, changes in sales were a significant variable only in the case of engineering industry and not for
all other industries.Krishnamur thy and Sastry (1971) examined the determinants of fixed investment expenditure for chemical industry using the data on 40 chemical companies,
collected from BSED. They employed OLS for their crosssectional analysis. No correction for price changes was made. The postulated investment function was: I
t
= f ( S
t
– S
t
–1
, RENT
t
,
FNDE
t
)where I
t
= Fixed capital expenditure, S
t
– S
t
–1
= Changes in sales; RENT
t
= Retained earningsand FNDE
t
= Flow of external funds. I
t
and
RENT
t
were deflated by gross fixed assets of previous year; FNDE
t
by networth of previous year.Their postulation assumed a relationship with accelerator principles
and financial variables.Results suggested the existence of accelerator for the years 1962, 1964 and 1966. Retainedearnings were significant only in 1962 and 1967, and
external finance in 1962, 1964, 1965and 1966 cross sections, when money and capital markets were relatively tighter.They concluded:“...financial variables appear to be significant. Retained
earnings exert influence oninvestment when the supply of funds is limited on account of poor profits. The impact
12
The functional model employed was as follows:For changes in sales – investment relationship:
It =
α
0
+
α
1
( S
t
–1
– S
t
–2
)+
α
2
(
S
t
–2
– S
t
–3
)+
α
3
( S
t
–3
– S
t
–4
)And for profit-investment relationship: It = ß
0
+ ß
1
P
t
–1
+ ß
2
P
t
–2
+ ß
3
P
t
–3
The Icfai Journal of Applied Finance, Vol. 14, No. 12, 200822
of external finance is felt on investment when money capital markets are
tight’(Krishnamurthy and Sastry, 1971, p. 182).In another work Krishnamurthy and Sastry (1975) examined the determinants of fixedand inventory investment within the framework of flexible
accelerator so as to includefinancial variables. In the model specification, they considered five different indicators of changes in sales (one current and four lagged), which were used to represent the
accelerator.Gross retained earnings (RENT) was defined as PAT and depreciation. Flow of debt (FNDE)was considered to represent external finance. This was defined to include
both current andnoncurrent liabilities after netting out corresponding items on the assets side. As inventory(IN) was an important charge on fund, it was expected to negatively affect investment infixed
assets (I). To take care of heteroscadasticity, they divided all variables by capital stock atend of previous year (i.e, K
t –1
). Their specification for cross-sectional analysis had the
followingfunction, in which Q and Y were dummy variables. Q was used to capture the effect
of differences arising from quarters different financial year of sample firms, and Y to capture yearspecific effects.
∑∑∑
= = −−−−
+++=
42 24011
jTt rtrtrtt jt j tt
K deltaSdY cQba K I
1
1111
−++++
−−−−
tK DRhK FNDE g K RENT f K ROIe
ttttt
Their estimates showed that accelerator had an important influence on
fixed investment,except in sugar and cement industries. Although availability of both internal and externalfunds was found significant, external funds had somewhat more impact
on fixed investment.Age of equipment, measured by Depreciation Reserves (DR), did not reveal any replacementeffect on fixed investment. And finally, fixed investment and
inventory were found to becompetitive. On the whole, accelerator, financial variables and inventory investment were thesignificant factors influencing corporate investment (Krishnamurthy and Sastry, 1975, p.
44).For examining determinants of investment in inventory (INVt), Krishnamurthy andSastry (1975) followed the following specification:
∑∑∑
= = =−−−
+++=
42 24011
jTt rtrtrtt jt j tt
K deltaSDY CQB A K INV
1111 1
−−−− −
++++
tttttt
K FNDEHK RENTGK IFK I NV E
As it is seen, inventory function was almost the same as that of fixed
investment withinthe framework of flexible accelerator. Stock of inventory at the beginning of the year( INV
t –1
) was included to take care of adjustment process of inventories
to desired level.Flow of external funds ( FNDE ) included both longand short-term debt. Fixed investment (I)
23Studies of Corporate Financing and Investment Behavior in India: A Survey
was included to asses the importance of the
two financial flow variables. Here again,they found significant role of accelerator as the determinant of inventory investment.Delayed adjustment of inventories to the
desired level was also indicated. Like in the context of fixed investment, both internal and external funds significantly influenced inventory investment,but external fund was more important than retained
earnings. Fixed investment was also foundto be significant, suggesting the interdependence (substitution) between the two. In brief, theOLS results suggested the significant role played
by accelerator, external funds and fixedinvestment in influencing inventory investment (Krishnamurthy and Sastry, 1975, p. 62).To confirm the results obtained in the crosssectional analysis, a
time series analysis wasalso carried out. The functional specification for fixed investment ( I
t
), inventory investment( IN
t
) had the following:
I
t
= f
1
( dS
t
, RENT
t
, FNDE
t
, IN
t
, K
t –1
) IN
t
= f
2
( dS
t
, RENT
t
, FNDE
t
, I
t
,
IN
t –1
)To estimate the functions, they used 2 Stage Least Square (2SLS) techniques. In the f
1
function, they used the price index of
machinery and equipment to deflate gross fixed assets,financial variables and inventory variables to express them in terms of purchasing power of investment goods. The output price index
was used to deflate sales. In f
2
function, inventorieswere deflated by the price index of inventories specially constructed for each industry. It wasthe weighted
average of price index of finished goods and raw materials. The weights weretheir respective shares in total inventories. This index was also used to deflate financial andfixed investment variables, to express
them in terms of purchasing power of inventories.Sales were deflated by the price index of finished goods.Based on the results, they concluded that accelerator was absent in both fixed
andinventory; financial variables were important, of which external finance was found to bemore significant in both fixed and inventory investment. Some amount of substitution wasalso
observed. Overall, though the demand factor was important for investment, financialfactors dominated. While internal funds were more important determinant of fixedinvestment,
external funds were in the case of inventory. They could not get evidences tosupport the independence of the triad decision, namely, investment, dividends and externalfinancing; however, both external
financing and investment decisions were found interrelated.As retained earnings were significant in investment decision, profitability became crucialvariable in influencing
investment. Further they argued that self financing wasnon-inflationary and hence firms were to be encouraged to invest through internal savingsby not going for higher dividend disbursal.Sastry
(1975) analyzed fixed investment decision of 59 companies in capital goods industry,using BSED data covering the period 1957-67. He used the accelerator hypotheses and includedthe role of
retained earnings and external funds. He attempted both cross sectional and timeseries models, with the following function: I
t
= f
( sales , rent , debt )
The Icfai Journal of Applied Finance, Vol. 14, No. 12, 200824
where
sales = Changes in sales, rent = Changes in retained earnings net of taxes but gross of depreciation and debt = Changes in stock of debt.Three equations
were tried: one, by deflating all these variables with capital stock (K)of previous year; two, series deflated by Networth (NW) of previous year; and, three, changesin the variables without
deflating them. These models were estimated using OLS.Five alternative formulations were tried: (a) single year; (b) two years aggregate; (c) three year aggregate; (d) three year and two
year aggregate; and (e) pooled crosssection. Single yearcross section revealed altogether different results of nonsignificant and unexpected sign forall explanatory variables. The other
formulations with two year aggregate and three yearaggregate were tried with consecutive years but non-overlapping years. Results showed thatfinancial variable such as flow of internal funds and
external funds played an important rolein investment decision and that of demand pressure, as indicated by changes in sales, did nothave the postulated impact. To test the presence of firms’ effect, Sastry
carried out a threecross section for 1962, 1964 and 1966 using aggregate changes in sales, rent and debt.The results showed the importance of financial variable. To estimate stable
structurerelationship, a pooled regression was tried. The results were consistent with that of two andthree year aggregate. Time series model was tried for each explanatory variable. These variablewas corrected
for price changes using index number of price of finished products of machineryand transport equipments with base 1952/53 = 100. The results suggested the influence of current
sales, however when lagged sales was tried it was found to be absent. Financial variableswere significant. Thus, Sastry (1975) found the strong influence of financial variable in allestimation, and
current sales only in time series.In the exercise of Swamy and Rao (1975), investment in fixed assets was explained byexternal finance (with elasticity of 0.06), along with age of equipment
(measured by capitalconsumption allowances). Changes in inventory were explained by sales and bank loan.Elasticity of the former was 0.52 and of the latter was 0.57 in the short run, pointing to
thesensitivity of inventory to bank loans. Interest cost did not appear to have influencedinventories .Corporate sector faced relatively higher tax rate. However, a plethora of tax
incentiveswere provided. Such incentive were expected to influence investment in two ways: one,through the rate of return effect by reducing the rental price of capital; and, two, throughliquidity
effect by increasing the accretion of internal funds. Instruments such as licensing,exchange regulation and price controls exerted somewhat negative influence on corporateinvestment
behavior, whereas tax incentives promoted investment. Somayajulu (1977)examined the role of tax incentives in promoting investment. This was considered alongwith accelerator hypothesis
(changes in sales), profits (PAT), retained earnings, and externalfund (longterm borrowing). All variables were taken at current prices. Data were obtainedfrom RBI for 142 public limited companies.
Wherever gap was found, information collectedfrom the BSED was used. In addition, more information was collected directly by mailedquestionnaire from these companies, of which 72 got
response. Regression analysis revealedthat profit after tax and long-term borrowing significantly influenced investment behavior.
25Studies of Corporate Financing and Investment Behavior in India: A Survey
Accelerator did not have the expected role. As Indian industries were operating in a regulatedenvironment, they could not satisfy the conditions underlying accelerator principle, namely,full utilization of capacity,
constant returns to scale, sales changes being permanent in character,a constant ratio between sales to output, firms not on declining phase of their life cycle andelastic supply of funds (Somayajulu,
1977, p. 43). And so, unitary elasticity of capital stock withrespect to sales could not be expected. Tax incentive introduced during the period also hadpositive influence on investment, except in
cement and fertilizers, which were debt dependent.Some other studies in the 1970s, such as Rao and Mishra (1976),
13
Tanwar (1978)
14
and Venkatachalam and Sarma (1978),
continued the emphasis on the role of accelerator andinternal funds in influencing corporate investment. In Venkatachalam and Sarma (1978),variables such as capacity utilization and long-term
external finance were also found to besignificant. They also observed accelerator impact on inventory investment, along withshort-term bank borrowing and retained earnings. Johar
et al . (1982) attempted to study the determinants of investment behavior of corporatesector and for cotton textiles, chemical and cement industry representing consumer,intermediat e and capital goods
for the period 1950-51 to 1974-75, using RBI statistics.In their model accelerator principle was incorporated through average of current sales andsales with one year lag and two year lag. One year
lagged Capacity Utilization ( CU ) wasincluded to represent the CU version of accelerator. Retained earnings and depreciationprovision as liquidity variables and PAT as percentage
of Gross Fixed Assets (GFA) reflectingRate of Return (RoR) were included. Flow of net debt was also added in the model so as torepresent External Finance ( EF
). A major departure in this study was the inclusion of stockprices in order to reflect the expectation of business activity. The model was of the followingform: GFI
t
=
f ( sales , CU
t –1
, RoR
t –1
, EF
t
, SP
t
)Results revealed the insignificant role of accelerator on the whole as well as acrossindustries. And also profitability played a lesser role.
They observed:“It is strange that sales and profitability were not significant in explaining investmentdecision in India. These variables are probably more relevant where market forces are
13
Using step wise regression and RBI statistics for the period from 1950-1951 to 1970-1971 for seven industrialgroups, Rao and Mishra (1976) examined investment behavior (I), by specifying following model:( I / K ) t =
f ( dS , RED , DBTFLW
t
–1
, NI , INV , DBTOUT
, DPRNST
t
–1
, LQDTY )Where dS = Changes in sales deflated by K
t
–1
or
t–2
; RED
= Gross internal funds including retained earning anddepreciation provision deflated by net worth; DBTFLW = Debt flow deflated by net worth; NI = Net issuesdeflated by net worth; DBTOUT = Debt outstanding deflated by net worth; DPRNST
= Cumulative depreciationreserves deflated by GFA ; LQDTY = Current liquidity represented by current assets to total net assets.
14
Tanwar (1978) covered the period from 1956 to 1975 using RBI statistics. His
model had the following function: It = f ( St , Pt , Dt , Ct *,
St *, Ut )Where It = Gross investment; St = Net sales; Pt = Retained profit; Dt = Depreciation provision; Ct * = Networth;
St * = Changes in sales. All the relevant variables were deflated by gross fixed asses withone year-lag. He used OLS.
Send the Academia.edu team a comment
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Search Peo
Studies of Corporate Financing and Investment Behavior in India: A Surveymore by Dennis Rajakumar 29 Download (.pdf)
21Studies of Corporate Financing and Investment Behavior in India: A Survey
these variables, say investment and profits, was not found, security prices affected
investment.Whenever security prices did not affect investment, profit affected investment. The role of government policies was also noted, particularly during 1960-1963, when
corporateinvestment was influenced by the state’s priority for modernization and renovation of theseindustries.By adding interest rates in the same model and using RBI statistics, Sarkar (1970)
examineddeterminants of corporate investment in industries, such as cotton textiles, engineering,sugar, cements and tea, which accounted for a larger weight for the period from 1950 to 1965.As
data on rate of interest could not be obtained industry-wise, variable dividend of industrialsecurities was used. Comparing the influence of changes in sales and profit (with a lag of one year), he argued
that private investment was crucially affected by PAT and changes in saleshad much less influence on the level of investment, except in engineering industries.As regards cotton textiles and
cement industries, interest rate had influenced investment,but in engineering industries, its effect was of the same degree as that of rate of profits. He alsoconsidered the
joint effect of both profits and security prices, and found that fall in profit inone year was covered up by a rise in security prices. He also attempted to capture the effect of profit after tax and changes
in sales through distributed lag model.
12
Even then, as shown bythe regression results, changes in sales were a significant variable only in the case of engineering industry and not for
all other industries.Krishnamur thy and Sastry (1971) examined the determinants of fixed investment expenditure for chemical industry using the data on 40 chemical companies,
collected from BSED. They employed OLS for their crosssectional analysis. No correction for price changes was made. The postulated investment function was: I
t
= f ( S
t
– S
t
–1
, RENT
t
,
FNDE
t
)where I
t
= Fixed capital expenditure, S
t
– S
t
–1
= Changes in sales; RENT
t
= Retained earningsand FNDE
t
= Flow of external funds. I
t
and
RENT
t
were deflated by gross fixed assets of previous year; FNDE
t
by networth of previous year.Their postulation assumed a relationship with accelerator principles
and financial variables.Results suggested the existence of accelerator for the years 1962, 1964 and 1966. Retainedearnings were significant only in 1962 and 1967, and
external finance in 1962, 1964, 1965and 1966 cross sections, when money and capital markets were relatively tighter.They concluded:“...financial variables appear to be significant. Retained
earnings exert influence oninvestment when the supply of funds is limited on account of poor profits. The impact
12
The functional model employed was as follows:For changes in sales – investment relationship:
It =
α
0
+
α
1
( S
t
–1
– S
t
–2
)+
α
2
(
S
t
–2
– S
t
–3
)+
α
3
( S
t
–3
– S
t
–4
)And for profit-investment relationship: It = ß
0
+ ß
1
P
t
–1
+ ß
2
P
t
–2
+ ß
3
P
t
–3
The Icfai Journal of Applied Finance, Vol. 14, No. 12, 200822
of external finance is felt on investment when money capital markets are
tight’(Krishnamurthy and Sastry, 1971, p. 182).In another work Krishnamurthy and Sastry (1975) examined the determinants of fixedand inventory investment within the framework of flexible
accelerator so as to includefinancial variables. In the model specification, they considered five different indicators of changes in sales (one current and four lagged), which were used to represent the
accelerator.Gross retained earnings (RENT) was defined as PAT and depreciation. Flow of debt (FNDE)was considered to represent external finance. This was defined to include
both current andnoncurrent liabilities after netting out corresponding items on the assets side. As inventory(IN) was an important charge on fund, it was expected to negatively affect investment infixed
assets (I). To take care of heteroscadasticity, they divided all variables by capital stock atend of previous year (i.e, K
t –1
). Their specification for cross-sectional analysis had the
followingfunction, in which Q and Y were dummy variables. Q was used to capture the effect
of differences arising from quarters different financial year of sample firms, and Y to capture yearspecific effects.
∑∑∑
= = −−−−
+++=
42 24011
jTt rtrtrtt jt j tt
K deltaSdY cQba K I
1
1111
−++++
−−−−
tK DRhK FNDE g K RENT f K ROIe
ttttt
Their estimates showed that accelerator had an important influence on
fixed investment,except in sugar and cement industries. Although availability of both internal and externalfunds was found significant, external funds had somewhat more impact
on fixed investment.Age of equipment, measured by Depreciation Reserves (DR), did not reveal any replacementeffect on fixed investment. And finally, fixed investment and
inventory were found to becompetitive. On the whole, accelerator, financial variables and inventory investment were thesignificant factors influencing corporate investment (Krishnamurthy and Sastry, 1975, p.
44).For examining determinants of investment in inventory (INVt), Krishnamurthy andSastry (1975) followed the following specification:
∑∑∑
= = =−−−
+++=
42 24011
jTt rtrtrtt jt j tt
K deltaSDY CQB A K INV
1111 1
−−−− −
++++
tttttt
K FNDEHK RENTGK IFK I NV E
As it is seen, inventory function was almost the same as that of fixed
investment withinthe framework of flexible accelerator. Stock of inventory at the beginning of the year( INV
t –1
) was included to take care of adjustment process of inventories
to desired level.Flow of external funds ( FNDE ) included both longand short-term debt. Fixed investment (I)
23Studies of Corporate Financing and Investment Behavior in India: A Survey
was included to asses the importance of the
two financial flow variables. Here again,they found significant role of accelerator as the determinant of inventory investment.Delayed adjustment of inventories to the
desired level was also indicated. Like in the context of fixed investment, both internal and external funds significantly influenced inventory investment,but external fund was more important than retained
earnings. Fixed investment was also foundto be significant, suggesting the interdependence (substitution) between the two. In brief, theOLS results suggested the significant role played
by accelerator, external funds and fixedinvestment in influencing inventory investment (Krishnamurthy and Sastry, 1975, p. 62).To confirm the results obtained in the crosssectional analysis, a
time series analysis wasalso carried out. The functional specification for fixed investment ( I
t
), inventory investment( IN
t
) had the following:
I
t
= f
1
( dS
t
, RENT
t
, FNDE
t
, IN
t
, K
t –1
) IN
t
= f
2
( dS
t
, RENT
t
, FNDE
t
, I
t
,
IN
t –1
)To estimate the functions, they used 2 Stage Least Square (2SLS) techniques. In the f
1
function, they used the price index of
machinery and equipment to deflate gross fixed assets,financial variables and inventory variables to express them in terms of purchasing power of investment goods. The output price index
was used to deflate sales. In f
2
function, inventorieswere deflated by the price index of inventories specially constructed for each industry. It wasthe weighted
average of price index of finished goods and raw materials. The weights weretheir respective shares in total inventories. This index was also used to deflate financial andfixed investment variables, to express
them in terms of purchasing power of inventories.Sales were deflated by the price index of finished goods.Based on the results, they concluded that accelerator was absent in both fixed
andinventory; financial variables were important, of which external finance was found to bemore significant in both fixed and inventory investment. Some amount of substitution wasalso
observed. Overall, though the demand factor was important for investment, financialfactors dominated. While internal funds were more important determinant of fixedinvestment,
external funds were in the case of inventory. They could not get evidences tosupport the independence of the triad decision, namely, investment, dividends and externalfinancing; however, both external
financing and investment decisions were found interrelated.As retained earnings were significant in investment decision, profitability became crucialvariable in influencing
investment. Further they argued that self financing wasnon-inflationary and hence firms were to be encouraged to invest through internal savingsby not going for higher dividend disbursal.Sastry
(1975) analyzed fixed investment decision of 59 companies in capital goods industry,using BSED data covering the period 1957-67. He used the accelerator hypotheses and includedthe role of
retained earnings and external funds. He attempted both cross sectional and timeseries models, with the following function: I
t
= f
( sales , rent , debt )
The Icfai Journal of Applied Finance, Vol. 14, No. 12, 200824
where
sales = Changes in sales, rent = Changes in retained earnings net of taxes but gross of depreciation and debt = Changes in stock of debt.Three equations
were tried: one, by deflating all these variables with capital stock (K)of previous year; two, series deflated by Networth (NW) of previous year; and, three, changesin the variables without
deflating them. These models were estimated using OLS.Five alternative formulations were tried: (a) single year; (b) two years aggregate; (c) three year aggregate; (d) three year and two
year aggregate; and (e) pooled crosssection. Single yearcross section revealed altogether different results of nonsignificant and unexpected sign forall explanatory variables. The other
formulations with two year aggregate and three yearaggregate were tried with consecutive years but non-overlapping years. Results showed thatfinancial variable such as flow of internal funds and
external funds played an important rolein investment decision and that of demand pressure, as indicated by changes in sales, did nothave the postulated impact. To test the presence of firms’ effect, Sastry
carried out a threecross section for 1962, 1964 and 1966 using aggregate changes in sales, rent and debt.The results showed the importance of financial variable. To estimate stable
structurerelationship, a pooled regression was tried. The results were consistent with that of two andthree year aggregate. Time series model was tried for each explanatory variable. These variablewas corrected
for price changes using index number of price of finished products of machineryand transport equipments with base 1952/53 = 100. The results suggested the influence of current
sales, however when lagged sales was tried it was found to be absent. Financial variableswere significant. Thus, Sastry (1975) found the strong influence of financial variable in allestimation, and
current sales only in time series.In the exercise of Swamy and Rao (1975), investment in fixed assets was explained byexternal finance (with elasticity of 0.06), along with age of equipment
(measured by capitalconsumption allowances). Changes in inventory were explained by sales and bank loan.Elasticity of the former was 0.52 and of the latter was 0.57 in the short run, pointing to
thesensitivity of inventory to bank loans. Interest cost did not appear to have influencedinventories .Corporate sector faced relatively higher tax rate. However, a plethora of tax
incentiveswere provided. Such incentive were expected to influence investment in two ways: one,through the rate of return effect by reducing the rental price of capital; and, two, throughliquidity
effect by increasing the accretion of internal funds. Instruments such as licensing,exchange regulation and price controls exerted somewhat negative influence on corporateinvestment
behavior, whereas tax incentives promoted investment. Somayajulu (1977)examined the role of tax incentives in promoting investment. This was considered alongwith accelerator hypothesis
(changes in sales), profits (PAT), retained earnings, and externalfund (longterm borrowing). All variables were taken at current prices. Data were obtainedfrom RBI for 142 public limited companies.
Wherever gap was found, information collectedfrom the BSED was used. In addition, more information was collected directly by mailedquestionnaire from these companies, of which 72 got
response. Regression analysis revealedthat profit after tax and long-term borrowing significantly influenced investment behavior.
25Studies of Corporate Financing and Investment Behavior in India: A Survey
Accelerator did not have the expected role. As Indian industries were operating in a regulatedenvironment, they could not satisfy the conditions underlying accelerator principle, namely,full utilization of capacity,
constant returns to scale, sales changes being permanent in character,a constant ratio between sales to output, firms not on declining phase of their life cycle andelastic supply of funds (Somayajulu,
1977, p. 43). And so, unitary elasticity of capital stock withrespect to sales could not be expected. Tax incentive introduced during the period also hadpositive influence on investment, except in
cement and fertilizers, which were debt dependent.Some other studies in the 1970s, such as Rao and Mishra (1976),
13
Tanwar (1978)
14
and Venkatachalam and Sarma (1978),
continued the emphasis on the role of accelerator andinternal funds in influencing corporate investment. In Venkatachalam and Sarma (1978),variables such as capacity utilization and long-term
external finance were also found to besignificant. They also observed accelerator impact on inventory investment, along withshort-term bank borrowing and retained earnings. Johar
et al . (1982) attempted to study the determinants of investment behavior of corporatesector and for cotton textiles, chemical and cement industry representing consumer,intermediat e and capital goods
for the period 1950-51 to 1974-75, using RBI statistics.In their model accelerator principle was incorporated through average of current sales andsales with one year lag and two year lag. One year
lagged Capacity Utilization ( CU ) wasincluded to represent the CU version of accelerator. Retained earnings and depreciationprovision as liquidity variables and PAT as percentage
of Gross Fixed Assets (GFA) reflectingRate of Return (RoR) were included. Flow of net debt was also added in the model so as torepresent External Finance ( EF
). A major departure in this study was the inclusion of stockprices in order to reflect the expectation of business activity. The model was of the followingform: GFI
t
=
f ( sales , CU
t –1
, RoR
t –1
, EF
t
, SP
t
)Results revealed the insignificant role of accelerator on the whole as well as acrossindustries. And also profitability played a lesser role.
They observed:“It is strange that sales and profitability were not significant in explaining investmentdecision in India. These variables are probably more relevant where market forces are
13
Using step wise regression and RBI statistics for the period from 1950-1951 to 1970-1971 for seven industrialgroups, Rao and Mishra (1976) examined investment behavior (I), by specifying following model:( I / K ) t =
f ( dS , RED , DBTFLW
t
–1
, NI , INV , DBTOUT
, DPRNST
t
–1
, LQDTY )Where dS = Changes in sales deflated by K
t
–1
or
t–2
; RED
= Gross internal funds including retained earning anddepreciation provision deflated by net worth; DBTFLW = Debt flow deflated by net worth; NI = Net issuesdeflated by net worth; DBTOUT = Debt outstanding deflated by net worth; DPRNST
= Cumulative depreciationreserves deflated by GFA ; LQDTY = Current liquidity represented by current assets to total net assets.
14
Tanwar (1978) covered the period from 1956 to 1975 using RBI statistics. His
model had the following function: It = f ( St , Pt , Dt , Ct *,
St *, Ut )Where It = Gross investment; St = Net sales; Pt = Retained profit; Dt = Depreciation provision; Ct * = Networth;
St * = Changes in sales. All the relevant variables were deflated by gross fixed asses withone year-lag. He used OLS.
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