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The Impact of Financial Structure on Firms' Financial Constraints: A Cross-Country Analysis

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Author Info

  • Christopher F. Baum

    ()
    (Boston College
    DIW Berlin)

  • Dorothea Schäfer

    ()
    (DIW Berlin)

  • Oleksandr Talavera

    ()
    (School of Economics, University of East Anglia)

Abstract

We estimate firms' cash flow sensitivity of cash to empirically test how the financial system's structure and activity level influence their financial constraints. For this purpose we merge Almeida et al. (2004), a path-breaking new design for evaluating a firm's financial constraints, with Levine (2002), who paved the way for comparative analysis of financial systems around the world. We conjecture that a country's financial system, both in terms of its structure and its level of development, influences the cash flow sensitivity of cash of constrained firms but leaves unconstrained firms unaffected. We test our hypothesis with a large international sample of 80,000 firm-years from 1989 to 2006. Our findings reveal that both the structure of the financial system and its level of development matter. Bank-based financial systems provide the constrained firms with easier access to external financing.

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Bibliographic Info

Paper provided by School of Economics, University of East Anglia, Norwich, UK. in its series University of East Anglia Applied and Financial Economics Working Paper Series with number 003.

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Date of creation: 21 Apr 2010
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Handle: RePEc:uea:aepppr:2010_3

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Postal: Helen Chapman, School of Economics, University of East Anglia, Norwich Research Park, Norwich, NR4 7TJ, UK
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Keywords: financial constraints; financial system; cash flow sensitivity of cash;

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Cited by:
  1. Nguyen, James, 2012. "The relationship between net interest margin and noninterest income using a system estimation approach," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2429-2437.
  2. Martinsson, Gustav & Lööf, Hans, 2009. "Internal Finance and Patents - evidence from firm-level data," Working Paper Series in Economics and Institutions of Innovation 194, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.

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