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Financial Frictions, Investment, and Institutions

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  • Yishay Yafeh
  • Kenichi Ueda
  • Stijn Claessens

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/231.

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Length: 45
Date of creation: 01 Oct 2010
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Handle: RePEc:imf:imfwpa:10/231

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Keywords: Corporate sector; Development; Economic growth; Economic models; measurement errors; correlation; equation; financial markets; standard deviation; financial economics; bond; instrumental variables; survey; statistics; autocorrelation; statistic; instrumental variable; financial market; measurement error; derivative; equity finance; cash flow; samples; stock market; stock returns; financial market development; equations; time series; bond market; sample size; financial intermediation; predictions; partial derivatives; statistical significance; bond prices; stock price; stochastic discount factor; stock markets; estimation technique; standard error; probability; bond market capitalization; private bond; cash flows; stock market capitalization; probability distribution; partial derivative; stochastic discount; international financial statistics; financial systems; descriptive statistics; corporate bond; financial statistics; stock prices; bonds; calibration; correlations; standard deviations; financial structure; firm valuation; financial deregulation; stata; functional form; sample selection; surveys; missing data; present value; fitted value; empirical result; number of regressors; stochastic process; standard errors; financial contracts; covariance; cash flow from operation; orthogonality; financial dependence; moral hazard; coefficient vector; normal distribution;

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Cited by:
  1. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, Elsevier, vol. 15(C), pages 1-33.

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