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

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  • Lubomir Lizal

    (The William Davidson Institute at the University of Michigan Business School and CEPR)

  • Jan Svejnar

    (The William Davidson Institute at the University of Michigan Business School and CEPR)

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 a 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 for privately owned-limited liability companies and foreign owned and mixed ownership firms. These results are consistent with the financing-hierarchy and credit-rationing 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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File URL: http://128.118.178.162/eps/dev/papers/0012/0012008.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Development and Comp Systems with number 0012008.

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Length: 41 pages
Date of creation: 16 Feb 2001
Date of revision:
Handle: RePEc:wpa:wuwpdc:0012008

Note: Type of Document - Acrobat PDF; pages: 41 ; figures: included
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Web page: http://128.118.178.162

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Keywords: Investment; Cash-flow; Restructuring; Ownership; Legal status; Transition to a market economy;

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References

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  1. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
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  3. Terrell, Katherine, 1992. "Productivity of western and domestic capital in polish industry," Journal of Comparative Economics, Elsevier, vol. 16(3), pages 494-514, September.
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  7. Lizal, Lubomir & Svejnar, Jan, 1998. "Enterprise Investment During the Transition: Evidence from Czech Panel Data," CEPR Discussion Papers 1835, C.E.P.R. Discussion Papers.
  8. 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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Citations

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Cited by:
  1. 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.
  2. Horvath, Roman, 2006. "Financial Accelerator Effects in the Balance Sheets of Czech Firms," MPRA Paper 829, University Library of Munich, Germany.
  3. Stepan Jurajda & Katherine Terrell, 2000. "Optimal Speed of Transition: Micro Evidence from the Czech Republic," William Davidson Institute Working Papers Series 355, William Davidson Institute at the University of Michigan.
  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. Dietrich Earnhart & Lubomir Lizal, 2002. "Effects of Ownership and Financial Status on Corporate Environmental Performance," CERGE-EI Working Papers wp203, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  6. Stepan Jurajda & Katherine Terrell, 2002. "Job Growth in Early Transition: Comparing Two Paths," CERGE-EI Working Papers wp201, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  7. Lubomir Lizal & Evzen Kocenda, 2000. "Corruption and Anticorruption in the Czech Republic," William Davidson Institute Working Papers Series 345, 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 2004-689, William Davidson Institute at the University of Michigan.
  9. Lubomir Lizal & Evzen Kocenda, 2001. "The Paradox of Czech Crusaders: Will They Ever Learn the Corruption Lesson? (Corruption and Anticorruption in the Czech Republic)," Public Economics 0106004, EconWPA.
  10. 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 wp856, William Davidson Institute at the University of Michigan.
  11. Lizal, Lubomir & Kocenda, Evzen, 2001. "State of corruption in transition: case of the Czech Republic," Emerging Markets Review, Elsevier, vol. 2(2), pages 138-160, June.

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