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How financial liberalization in Indonesia affected firms'capital structure and investment decisions

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Author Info

  • Harris, John R.
  • Schiantarelli, Fabio
  • Siregar, Miranda G.

Abstract

How did financial liberalization affect Indonesian firms? The authors analyzed real and financial indicators for the establishments in their panel of Indonesian manufacturing establishments for 1981-88. Their sample was not representative, but their evidence shows that economic reform had favorable effect on the performance of smaller firms. Liberalization helped reallocate domestic credit toward smaller firms to a level roughly proportionate to their contribution to value-added. Moreover, other firms were successful in replacing expensive domestic credit with cheaper foreign credit, releasing some domestic credit to establishments that lacked access to it. Nominal and real interest rates rose to very high levels, but real returns to capital assets remain high and have increased substantially for small and medium-size exporting establishments. For all groups, higher rates of financial leverage gave rise to extremely high returns on owned equity. Medium-size firms - both conglomerate and non-conglomerate - have had the highest rates of return to capital, financial leverage, and returns to equity. Financial reform has had a significant impact on firm's real and financial choices. Shifting from administrative allocations of credit to market-based allocations has increased borrowing costs, particularly for smaller firms, but it has also widened access to finance. The net effect appears to have been a decrease in the degree of market segmentation and a relaxation of financial constraints to the benefit of investment activity.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 997.

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Date of creation: 31 Oct 1992
Date of revision:
Handle: RePEc:wbk:wbrwps:997

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Related research

Keywords: Banks&Banking Reform; Environmental Economics&Policies; Financial Intermediation; Economic Theory&Research; Financial Crisis Management&Restructuring;

References

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  1. Michael Devereux & Fabio Schiantarelli, 1990. "Investment, Financial Factors, and Cash Flow: Evidence from U.K. Panel Data," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 279-306 National Bureau of Economic Research, Inc.
  2. Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 233-257.
  3. Tybout, James, 1986. "A firm-level chronicle of financial crises in the Southern Cone," Journal of Development Economics, Elsevier, vol. 24(2), pages 371-400, December.
  4. Gertler, M. & Rose, A., 1991. "Finance, growth, and public policy," Policy Research Working Paper Series 814, The World Bank.
  5. 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.
  6. Nabi, Ijaz, 1989. "Investment in Segmented Capital Markets," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 453-62, August.
  7. Tybout, James R, 1983. "Credit Rationing and Investment Behavior in a Developing Country," The Review of Economics and Statistics, MIT Press, vol. 65(4), pages 598-607, November.
  8. Cho, Yoon Je, 1988. "The effect of financial liberalization on the efficiency of credit allocation : Some evidence from Korea," Journal of Development Economics, Elsevier, vol. 29(1), pages 101-110, July.
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Cited by:
  1. Agustinus Prasetyantoko, 2006. "Debt Composition and Balance Sheet Effect of Currency Crisis in Indonesia," Post-Print halshs-00134223, HAL.

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