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Financial Conditions and Investment during the Transition: Evidence from Czech Firms

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  • Lubomír Lízal
  • Jan Svejnar

Abstract

In this paper, we examine net investment during the early stages of transition using micro data on the population of medium and large industrial firms in the Czech Republic during the 1992-95 period. We examine the relevance of alternative models of investment and test if investment behavior varies across categories of ownership and with the legal status of firms. Our analysis of depreciation leads us to the conclusion that replacement investment displays a similar pattern in many ownership-legal form categories of firms. Retained profit is found to be the major determinant of new investment and the estimate is statistically significant even when we use the most robust fixed effects estimates based on one-year differences. We find that enterprise profitability has a strong positive effect on investment in all types of firms except privately owned-limited liability companies and foreign owned and mixed ownership firms. These results are consistent with the financing-hierarchy and credit-rationng hypotheses which indicate that domestic firms cannot easily borrow investment funds externally and that net investment varies with retained profits. Firms take into account various stock measures of internal finance. In particular, a stock of cash, receivables, receivables overdue, payables, and payables overdue systematically affect net investment.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 399.

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Length: pages
Date of creation: 01 Oct 2001
Date of revision:
Handle: RePEc:wdi:papers:2001-399

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Keywords: investment; cash-flow; restructuring; ownership; legal status; transition to a market economy;

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  1. Blanchard, Olivier & Rhee, Changyong & Summers, Lawrence, 1993. "The Stock Market, Profit, and Investment," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(1), pages 115-36, February.
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  9. repec:fth:harver:1491 is not listed on IDEAS
  10. Terrell, Katherine, 1992. "Productivity of western and domestic capital in polish industry," Journal of Comparative Economics, Elsevier, vol. 16(3), pages 494-514, September.
  11. 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.
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  15. R. Glenn Hubbard & Anil K Kashyap & Toni M. Whited, 1993. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
  16. Lubomir Lizal & Jan Svejnar, 1997. "Enterprise Investment During the Transition: Evidence from Czech Panel Data," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 60, William Davidson Institute at the University of Michigan.
  17. Lubomir Lizal, 2001. "Depreciation Rates in a Transition Economy: Evidence from Czech Panel Data," Microeconomics, EconWPA 0012004, EconWPA.
  18. Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1425-60, September.
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Citations

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Cited by:
  1. Lubomir Lizal & Evzen Kocenda, 2001. "The Paradox of Czech Crusaders: Will They Ever Learn the Corruption Lesson? (Corruption and Anticorruption in the Czech Republic)," CERGE-EI Working Papers wp171, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  2. Roman Horváth, 2005. "Financial Accelerator Effects in the Balance Sheets of Czech Firms," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 96, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  3. Earnhart, Dietrich & Lizal, Lubomir, 2002. "Effects of Ownership and Financial Status on Corporate Environmental Performance," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3557, C.E.P.R. Discussion Papers.
  4. Stepan Jurajda & Katherine Terrell, 2001. "What Drives the Speed of Job Reallocation during Episodes of Massive Adjustment?," CERGE-EI Working Papers wp170, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  5. Stepán Jurajda & Katherine Terrell, 2003. "Job growth in early transition: Comparing two paths ," The Economics of Transition, The European Bank for Reconstruction and Development, The European Bank for Reconstruction and Development, vol. 11(2), pages 291-320, June.
  6. Stepan Jurajda & Katherine Terrell, 2000. "Optimal Speed of Transition: Micro Evidence from the Czech Republic," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 355, William Davidson Institute at the University of Michigan.
  7. Dietrich Earnhart & Lubomir Lizal, 2007. "Does Better Environmental Performance Affect Revenues, Cost, or Both? Evidence From a Transition Economy," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan wp856, William Davidson Institute at the University of Michigan.
  8. Maxim Bouev, 2004. "Diverging Paths: Transition in the Presence of the Informal Sector," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 2004-689, William Davidson Institute at the University of Michigan.
  9. Lubomir Lizal & Evzen Kocenda, 2000. "Corruption and Anticorruption in the Czech Republic," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 345, William Davidson Institute at the University of Michigan.
  10. Lizal, Lubomir & Kocenda, Evzen, 2001. "State of corruption in transition: case of the Czech Republic," Emerging Markets Review, Elsevier, Elsevier, vol. 2(2), pages 138-160, June.
  11. Earnhart, Dietrich & Lizal, Lubomir, 2006. "Effects of ownership and financial performance on corporate environmental performance," Journal of Comparative Economics, Elsevier, vol. 34(1), pages 111-129, March.

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