Investment–cash flow sensitivity and financing constraints: New evidence from Indian business group firms

A controversy exists on the use of the investment–cash flow sensitivity as a measure of financing constraints of firms. We re-examine this controversy by analyzing firms affiliated to Indian business groups. We find a strong investment–cash flow sensitivity for both group-affiliated and independent firms, but no significant difference in the sensitivity between them. Additional tests consistently demonstrate that investment–cash flow sensitivity of Indian group affiliated firms is not significantly lower relative to unaffiliated firms.