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Do external funds yield lower returns?: Recent evidence from East Asian economies

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  • Driffield, Nigel
  • Pal, Sarmistha

Abstract

Using a large firm level panel data set from four Asian countries, this paper compares the returns to various internal and external funds. A novel feature of our analysis is that we distinguish between financially constrained and unconstrained firms and determine selectivity-corrected estimates of rates of return to internal and external funds in markets characterised by information problems. Results derived from a unique random effects panel data model with selection and unobserved heterogeneity suggest evidence of significant misallocation, especially in external financing of investment. While these results contrast some of the existing results, they seem to complement the moral hazard arguments put forward by the macro literature on the recent Asian crisis.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Asian Economics.

Volume (Year): 17 (2006)
Issue (Month): 1 (February)
Pages: 171-188

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Handle: RePEc:eee:asieco:v:17:y:2006:i:1:p:171-188

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Cited by:
  1. Nigel Driffield & Vidya Mahambare & Sarmistha Pal, 2004. "Dynamic Adjustment of Corporate Leverage: Is there a lesson to learn from the Recent Asian Crisis?," Finance 0405007, EconWPA.
  2. Nigel Driffield & Sarmistha Pal, 2010. "Evolution of capital structure in east Asia-corporate inertia or endeavours?," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 173(1), pages 1-29.

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