Institutions, Financial Frictions, and Investment: Estimation with Structural Restrictions (original) (raw)

Financial Frictions, Investment, and Institutions

IMF Working Papers, 2010

Financial frictions have been identified as key factors affecting economic fluctuations and growth. But, can institutional reforms reduce financial frictions? Based on a canonical investment model, we consider two potential channels: (i) financial transaction costs at the firm level; and (ii) required return at the country level. We empirically investigate the effects of institutions on these financial frictions using a panel of 75,000 firm-years across 48 countries for the period 1990-2007. We find that improved corporate governance (e.g., less informational problems) and enhanced contractual enforcement reduce financial frictions, while stronger creditor rights (e.g., lower collateral constraints) are less important. JEL Classification Numbers:G30, O16, O43

Investment and Institutions

2010

We study how financial systems and institutional environments affect investment efficiency using a sample of some 300,000 firm-years from 48 countries. Based on a canonical investment model, we identify two possible channels by which institutional environments may affect investment: firm-level financial frictions and the macro-level required rate of return. We find that a good institutional environment, in particular strong corporate governance, reduces financial frictions and lowers the required rate of return, thereby enhancing efficiency in capital allocation. This result is broadly consistent with previous literature, but the mechanism identified here is novel and more precise.

Corporate governance as a mechanism to alleviate financing constraints on investment

2012

Governance as a mechanism to alleviate financing constraints on investment Russian evidence Anna Grosman, Imperial College Business School January 2010-January 2013. Email: a.grosman09@imperial.ac.uk This paper addresses whether adopting good governance standards alleviates financing constraints on investment via improved internal efficiency or access to external capital. The Russian context serves as an appropriate laboratory for studying longitudinal effect of governance. We test if corporate governance acts as a moderator between financing constraints on investment and internal efficiency, i.e. the effect of internal efficiency on improving investments is amplified in presence of good governance. We also test for mediation and moderation effects between governance and

The Impact of Corporate Governance on Investment Returns in Developed and Developing Countries*

The Economic Journal, 2003

We set out to shed light on three conundrums that exist in the literature on investment: why do investments out of different sources of finance earn different returns, why do different studies report different patterns of returns, and why do companies in developing countries make greater use of external capital to finance their investment than do companies in developed countries?

Corporate Governance and the Determinants of Investment

Journal of Institutional and Theoretical Economics JITE, 2007

We use investment-cash flow regressions to show that both asymmetric-information and agency problems are more severe in Continental Europe than in the Anglo-Saxon countries leading to too little investment by firms with attractive investment opportunities and too much by those with poor investment opportunities. Legal systems, accounting standards, and ownership structure systematically affect the investment-cash flow sensitivity. Cash flow coefficients are largest for family-controlled firms in Europe.

Financial Development, Financial Constraints and Firm Investment: Cross Country Evidence

Previous studies using macroeconomic data have shown that financial development is positively correlated with higher growth . Further work at the industry level reveals that financial development matters more for firms that are dependent on external finance (Rajan and Zingales, 1998). However, the effect of financial liberalization and development may differ widely across firms, given that intra-industry variation is often greater than inter-industry variation (MacKay and Phillips, 2002). Consequently, to accurately assess the effect of financial development, it is necessary to consider that those firms that can benefit from financial liberalization and development may be systematically different from those that cannot. This paper explores the links between financial development and investment growth at the firm level, across developed and developing countries. To accurately account for the effects of financial development on firm level performance, we introduce program evaluation techniques that properly account for the impact of the "treatment on the treated." We find that failure to control for the effect of "participation" in financial development leads to biased estimates of the effect of financial development on investment growth. JEL Classification: O4, F3, G1

Institutions, Investment and Economic Growth: Evidence from Sub Saharan Africa

4th International Research Conference of Uva Wellassa University 2020 , 2020

The study examined the impact of financial liberalization on Nigerian manufacturing firms’ access to finance, using firm-level data of 3801 from WBES from 2007-2014. Although, cross-country literature extensively discussed on the effect of financial liberalization on credit constraints, the studies significantly overlooked the Nigerian case. To achieve this goal, the research developed a model based on the New Keynesian Theory of Credit Constraints and categorized the firms into four different constraints group, the results indicate that financial liberalization reduces the probability of being credit constrained, with the effect strongest for Deterred Investors and Active Investors. Increase in the degree of liberalization decrease the probability of being credit constrained by between 2 and 3 percent depending on the constraint definition. Furthermore, the result also provides evidence indicating that firms new to using financial system, that is New Entrants, do not benefit from financial liberalization. Thus, this points to the relevant of information asymmetry in the Nigerian financial market a significant factor exacerbating market imperfection especially in the developing countries. Such effect of financial liberalization on financial constraints can be link to weak institutional environment.

Corporate Governance, Investment And Business Growth

Journal of Applied Business Research (JABR), 2016

The purpose of this study is to bridge the gap between theory and corporate governance practices in selected emerging and developed economies, and assess its impact on corporate growth and productivity. Our investigation yields a negative relationship between corporate governance and investment levels and GDP growth in these countries.