Information asymmetry and financing constraints in GCC

This paper studies the information asymmetry and financing constraints in the Gulf Cooperation Council (GCC) region. The asymmetrical distribution of information between the insiders and outsiders of the firm brings forth a wedge between the costs of internal and external funds, which renders them imperfect substitutes. A sample of non-financial firms from six GCC countries is considered. The firms are grouped into sub-groups through an ex ante parameterization of their degree of financing constraints. The results show that the investment exhibits an excess of sensitivity to cash flow and the investment–cash flow sensitivity increases monotonically in the degree of information asymmetry's severity. The results can be explained in terms of restricted access to external finance. For instance, firms in GCC economies that finance their activities in compliance with shari'ah (i.e., Islamic law) have a narrower array of Islamic financial products, which renders their costs higher than those of the conventional financial products. Fostering the development of GCC financial markets and the implementation of efficient regulatory devices would improve the financing conditions and enhance the growth of firms in the Gulf region.