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Financial Liberalization and Real Investment

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  • Cemile Sancak
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    Abstract

    There is increasing emphasis on the importance of efficient financial markets for sustained real investment and economic growth, yet limited empirical research on the effects of the deregulation of financial markets on the firm''s investment decisions. The purpose of this paper is to model the impact of financial reforms on borrowing constraints faced by firms and to test the impact of financial reforms on the investment decisions of firms in Turkey. To do so, the paper builds a dynamic investment model, where financial variables and real investment are linked through the net present value of the firm. The derived investment model is employed to test whether Turkey''s efforts at financial liberalization in 1980 were able to relax the borrowing constraints faced by Turkish firms. A dynamic panel data methodology is used on a panel data set of 1036 Turkish firms over the 1983-86 period. In addition, time-series analysis is employed on Turkish aggregate data over the 1971-91 period.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/100.

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    Length: 35
    Date of creation: 01 Jun 2002
    Date of revision:
    Handle: RePEc:imf:imfwpa:02/100

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    References

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    1. 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.
    2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    3. Toni M. Whited, 1990. "Debt, liquidity constraints, and corporate investment: evidence from panel data," Finance and Economics Discussion Series 114, Board of Governors of the Federal Reserve System (U.S.).
    4. Ahn, Seung C. & Schmidt, Peter, 1995. "Efficient estimation of models for dynamic panel data," Journal of Econometrics, Elsevier, vol. 68(1), pages 5-27, July.
    5. Denizer, Cevdet, 1997. "The effects of financial liberalization and new bank entry on market structure and competition in Turkey," Policy Research Working Paper Series 1839, The World Bank.
    6. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
    7. Jaramillo, Fidel & Schiantarelli, Fabio & Weiss, Andrew, 1993. "Capital market imperfections before and after financial liberalization : a Euler Equation approach to panel data for Ecuadorian firms," Policy Research Working Paper Series 1091, The World Bank.
    8. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
    9. Stephen Bond & Costas Meghir, 1990. "Dynamic Investment Models and the Firm's Financial Policy," CEPR Financial Markets Paper 0013, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
    10. Fumio Hayashi & Tohru Inoue, 1990. "The Relation Between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms," NBER Working Papers 3326, National Bureau of Economic Research, Inc.
    11. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
    12. Keane, Michael P & Runkle, David E, 1992. "On the Estimation of Panel-Data Models with Serial Correlation When Instruments Are Not Strictly Exogenous," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(1), pages 1-9, January.
    13. Jaffee, Dwight M & Russell, Thomas, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 651-66, November.
    14. Guncavdi, Oner & Bleaney, Michael & McKay, Andrew, 1998. "Financial liberalisation and private investment: evidence from Turkey," Journal of Development Economics, Elsevier, vol. 57(2), pages 443-455.
    15. 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.
    16. 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.
    17. Fabio Schiantarelli & Andrew Weiss & Fidel Jaramillo, 1993. "Capital Market Imperfections Before And After Financial Liberization: An Euler Equation Approach To Panel Data For Ecuadorian Firms," Boston College Working Papers in Economics 221, Boston College Department of Economics.
    18. Michael A. Salinger & Lawrence H. Summers, 1984. "Tax Reform and Corporate Investment: A Microeconometric Simulation Study," NBER Working Papers 0757, National Bureau of Economic Research, Inc.
    19. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Demir, Firat, 2007. "Private Investment and Cash Flow Relationship Revisited: Capital Market Imperfections and Financialization of Real Sectors in Emerging Markets," MPRA Paper 3081, University Library of Munich, Germany.
    2. José Ricardo Santana & Fernando Garcia, 2004. "World financial liberalization and its effects on capital flows," Econometric Society 2004 Latin American Meetings 101, Econometric Society.
    3. Abiad, Abdul & Oomes, Nienke & Ueda, Kenichi, 2008. "The quality effect: Does financial liberalization improve the allocation of capital?," Journal of Development Economics, Elsevier, vol. 87(2), pages 270-282, October.

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