Advanced Search
MyIDEAS: Login to save this article or follow this journal

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

Contents:

Author Info

  • Driffield, Nigel
  • Pal, Sarmistha

Abstract

One of the central explanations of the recent Asian Crisis has been the problem of moral hazard as the source of over-investment and excessive external borrowing. There is however rather limited firm-level empirical evidence to characterise inefficient use of internal and external finances. Using a large firm-level panel data-set from four badly affected Asian countries, this paper compares the rates of return to various internal and external funds among firms with low and high debt financing (relative to equity) among financially constrained and other firms. Selectivity corrected estimates obtained from random effects panel data model do suggest evidence of significantly lower rates of return to long-term debt, even among firms relying more on debt relative to equity in our sample. There is also evidence that average effective interest rates often significantly exceeded the average returns to long- term debt in the sample countries in the pre-crisis period.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6W53-4J9N0TV-1/2/5937542e85e2dfe37add0149870ac20a
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

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

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

as in new window
Handle: RePEc:eee:asieco:v:17:y:2006:i:1:p:171-188

Contact details of provider:
Web page: http://www.elsevier.com/locate/asieco

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Koo, Chung Mo, 2002. "Fiscal sustainability in the wake of the economic crisis in Korea," Journal of Asian Economics, Elsevier, vol. 13(5), pages 659-669.
  2. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
  3. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, vol. 93(3), pages 433-46, August.
  4. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper Tigers? A Model of the Asian Crisis," NBER Working Papers 6783, National Bureau of Economic Research, Inc.
  5. Green, David Jay, 2004. "Investment behavior and the Economic Crisis in Indonesia," Journal of Asian Economics, Elsevier, vol. 15(2), pages 287-303, April.
  6. R. Glenn Hubbard & Anil K Kashyap & Toni M. Whited, 1993. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
  7. Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series 93-4, Board of Governors of the Federal Reserve System (U.S.).
  8. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  9. Claessens, Stijn & Djankov, Simeon & Xu, Lixin Colin, 2000. "Corporate Performance in the East Asian Financial Crisis," World Bank Research Observer, World Bank Group, vol. 15(1), pages 23-46, February.
  10. Driffield, Nigel & Pal, Sarmistha, 2001. "The East Asian crisis and financing corporate investment: is there a cause for concern?," Journal of Asian Economics, Elsevier, vol. 12(4), pages 507-527.
  11. Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-60, September.
  12. Verbeek, Marno & Nijman, Theo, 1992. "Testing for Selectivity Bias in Panel Data Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(3), pages 681-703, August.
  13. Owen Lamont, 1996. "Cash Flow and Investment: Evidence from Internal Capital Markets," NBER Working Papers 5499, National Bureau of Economic Research, Inc.
  14. Bruce D. Smith & John H. Boyd, 1998. "The evolution of debt and equity markets in economic development," Economic Theory, Springer, vol. 12(3), pages 519-560.
  15. Bronwyn H. Hall, 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," NBER Working Papers 4096, National Bureau of Economic Research, Inc.
  16. Doukas, John, 1995. "Overinvestment, Tobin's q and gains from foreign acquisitions," Journal of Banking & Finance, Elsevier, vol. 19(7), pages 1285-1303, October.
  17. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  18. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  19. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
  20. Laeven, Luc, 2002. "Financial constraints on investments and credit policy in Korea," Journal of Asian Economics, Elsevier, vol. 13(2), pages 251-269.
  21. Demetriades, Panicos O. & Luintel, Kul B., 2001. "Financial restraints in the South Korean miracle," Journal of Development Economics, Elsevier, vol. 64(2), pages 459-479, April.
  22. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  23. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  24. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 1995. "Stock market development and firm financing choices," Policy Research Working Paper Series 1461, The World Bank.
  25. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  26. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1991. "A test of the free cash flow hypothesis*1: The case of bidder returns," Journal of Financial Economics, Elsevier, vol. 29(2), pages 315-335, October.
  27. Andrew P. Dickerson & Heather D. Gibson & Euclid Tsakalotos, 1996. "Internal vs External Financing of Acquisitions: Do Managers Squander Retained Profits?," Studies in Economics 9618, Department of Economics, University of Kent.
  28. Clarke, Roger & Davies, Stephen & Waterson, Michael, 1984. "The Profitability-Concentration Relation: Market Power or Efficiency?," Journal of Industrial Economics, Wiley Blackwell, vol. 32(4), pages 435-50, June.
  29. Conyon, M & Machin, Stephen, 1991. "The Determination of Profit Margins in UK Manufacturing," Journal of Industrial Economics, Wiley Blackwell, vol. 39(4), pages 569-82, June.
  30. Charles J. Hadlock, 1998. "Ownership, Liquidity, and Investment," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 487-508, Autumn.
  31. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  32. Fazzari, Steven M & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Investment, Financing Decisions, and Tax Policy," American Economic Review, American Economic Association, vol. 78(2), pages 200-205, May.
  33. Baltagi, Badi H & Griffin, James M, 1989. "Alternative Models of Managerial Behavior: Empirical Tests for the Petroleum Industry," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 579-85, November.
  34. Schiantarelli, Fabio, 1996. "Financial Constraints and Investment: Methodological Issues and International Evidence," Oxford Review of Economic Policy, Oxford University Press, vol. 12(2), pages 70-89, Summer.
  35. Nijman, T.E. & Verbeek, M.J.C.M., 1992. "Testing for selectivity in panel data models," Open Access publications from Tilburg University urn:nbn:nl:ui:12-153280, Tilburg University.
  36. Charoenseang, June & Manakit, Pornkamol, 2002. "Financial crisis and restructuring in Thailand," Journal of Asian Economics, Elsevier, vol. 13(5), pages 597-613.
  37. Paul Geroski & Steve Machin & John Van Reenen, 1993. "The Profitability of Innovating Firms," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 198-211, Summer.
  38. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
  39. Khalid, Ahmed M. & Kawai, Masahiro, 2003. "Was financial market contagion the source of economic crisis in Asia?: Evidence using a multivariate VAR model," Journal of Asian Economics, Elsevier, vol. 14(1), pages 131-156, February.
  40. Steve Bond & Costas Meghir, 1994. "Financial constraints and company investment," Fiscal Studies, Institute for Fiscal Studies, vol. 15(2), pages 1-18, May.
  41. Hellmann, Thomas & Stiglitz, Joseph, 2000. "Credit and equity rationing in markets with adverse selection," European Economic Review, Elsevier, vol. 44(2), pages 281-304, February.
  42. Baumol, William J, et al, 1970. "Earnings Retention, New Capital and the Growth of the Firm," The Review of Economics and Statistics, MIT Press, vol. 52(4), pages 345-55, November.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

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. Driffield, Nigel & Pal, Sarmistha, 2008. "Evolution of Capital Structure in East Asia: Corporate Inertia or Endeavours?," IZA Discussion Papers 3426, Institute for the Study of Labor (IZA).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:asieco:v:17:y:2006:i:1:p:171-188. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.