Abstract:
Purpose – This study aims to primarily investigate two vital questions: First, the authors examine whether
group-affiliated firms are more (less) financially constrained vis- a-vis standalone firms. The authors estimate
working capital investment (WCI) to cash flow sensitivity to understand the nature of financial constraints.
Second, the authors further investigate the impact of working capital level on firm values and risks between
group-affiliated and standalone firms.
Design/methodology/approach – This paper uses balanced panel data set from the year 2012–2019. The
authors employ propensity score matching to ascertain comparable firm attributes from business group and
standalone firms. This process yields 280 firms (140 in each group) after controlling the firm heterogeneity
between these two groups. All the models are estimated using fixed-effect regression.
Findings – The authors find that group affiliated firms are less financially constrained than standalone firms.
The results show that WCI to cash flow sensitivity is higher in standalone firms vis-a-vis group-affiliated firms,
implying that standalone firms are more financially constrained than group-affiliated firms. Second, the
authors find that firm values are more sensitive to working capital level in standalone firms versus groupaffiliated firms. Furthermore, the authors document that the risk of the standalone firms is less sensitive to
working capital level than that of group-affiliated firms.
Originality/value – Most recent studies exploring the role of group affiliation in financing constraints have
not controlled for heterogeneity among group-affiliated firms vis- a-vis standalone firms, which may arise due to
variation in firm characteristics. Unlike prior studies, this research design ascertains comparable firm
attributes between business group and standalone firms, implying firms belonging to these two groups differ
by the exogeneous affiliation (business group and standalone firms). The authors document that groupaffiliated firms are less financially constrained than standalone firms controlling firm-level heterogeneity
between group-affiliated and standalone firms. To the best of the authors’ knowledge, no such work has been
previously done in general (specifically in India).