Advanced Search
MyIDEAS: Login to save this paper or follow this series

Do External Funds Yield Lower Returns? Recent Evidence From East Asian Economies

Contents:

Author Info

  • Sarmistha Pal

    (Brunel University)

Abstract

One of the central explanations of the recent Asian Crisis has been the problem of moral hazard as the source of over-investment and excessive external borrowing. There is however rather limited firm-level empirical evidence to characterise inefficient use of internal and external finances. Using a large firm-level panel data-set from four badly affected Asian countries, this paper compares the rates of return to various internal and external funds among firms with low and high debt financing (relative to equity) among financially constrained and other firms. Selectivity corrected estimates obtained from random effects panel data model do suggest evidence of significantly lower rates of return to long-term debt, even among firms relying more on debt relative to equity in our sample. There is also evidence that average effective interest rates often significantly exceeded the average returns to long- term debt in the sample countries in the pre-crisis period.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://128.118.178.162/eps/dev/papers/0512/0512021.pdf
Download Restriction: no

Bibliographic Info

Paper provided by EconWPA in its series Development and Comp Systems with number 0512021.

as in new window
Length: 36 pages
Date of creation: 21 Dec 2005
Date of revision:
Handle: RePEc:wpa:wuwpdc:0512021

Note: Type of Document - pdf; pages: 36
Contact details of provider:
Web page: http://128.118.178.162

Related research

Keywords: Asian Crisis; Efficiency of internal and external funds; Moral hazard of bad loans; Financial constraint; Random effects model with selection;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(2), pages 187-221, June.
  2. Nijman, T.E. & Verbeek, M.J.C.M., 1992. "Testing for selectivity in panel data models," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-153280, Tilburg University.
  3. Bronwyn H. Hall., 1992. "Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?," Economics Working Papers, University of California at Berkeley 92-194, University of California at Berkeley.
  4. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Lamont, Owen, 1997. " Cash Flow and Investment: Evidence from Internal Capital Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 52(1), pages 83-109, March.
  6. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers, Banca Italia - Servizio di Studi 343, Banca Italia - Servizio di Studi.
  7. 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.
  8. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
  9. Charles J. Hadlock, 1998. "Ownership, Liquidity, and Investment," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 487-508, Autumn.
  10. 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.
  11. Mark Gertler & Simon Gilchrist, 1991. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," NBER Working Papers 3892, National Bureau of Economic Research, Inc.
  12. Laeven, Luc, 2002. "Financial constraints on investments and credit policy in Korea," Journal of Asian Economics, Elsevier, Elsevier, vol. 13(2), pages 251-269.
  13. Hellmann, Thomas & Stiglitz, Joseph, 2000. "Credit and equity rationing in markets with adverse selection," European Economic Review, Elsevier, Elsevier, vol. 44(2), pages 281-304, February.
  14. Schiantarelli, Fabio, 1996. "Financial Constraints and Investment: Methodological Issues and International Evidence," Oxford Review of Economic Policy, Oxford University Press, Oxford University Press, vol. 12(2), pages 70-89, Summer.
  15. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1991. "A test of the free cash flow hypothesis*1: The case of bidder returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 29(2), pages 315-335, October.
  16. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 1998. "Paper Tigers? A Model of the Asian Crisis," NBER Working Papers 6783, National Bureau of Economic Research, Inc.
  17. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 36(1), pages 193-225, March.
  18. Baumol, William J, et al, 1970. "Earnings Retention, New Capital and the Growth of the Firm," The Review of Economics and Statistics, MIT Press, vol. 52(4), pages 345-55, November.
  19. Driffield, Nigel & Pal, Sarmistha, 2001. "The East Asian crisis and financing corporate investment: is there a cause for concern?," Journal of Asian Economics, Elsevier, Elsevier, vol. 12(4), pages 507-527.
  20. Charoenseang, June & Manakit, Pornkamol, 2002. "Financial crisis and restructuring in Thailand," Journal of Asian Economics, Elsevier, Elsevier, vol. 13(5), pages 597-613.
  21. Steve Bond & Costas Meghir, 1994. "Financial constraints and company investment," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 15(2), pages 1-18, May.
  22. Clarke, Roger & Davies, Stephen & Waterson, Michael, 1984. "The Profitability-Concentration Relation: Market Power or Efficiency?," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 32(4), pages 435-50, June.
  23. Andrew P. Dickerson & Heather D. Gibson & Euclid Tsakalotos, 1996. "Internal vs External Financing of Acquisitions: Do Managers Squander Retained Profits?," Studies in Economics, Department of Economics, University of Kent 9618, Department of Economics, University of Kent.
  24. 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.
  25. Fazzari, Steven M & Hubbard, R Glenn & Petersen, Bruce C, 1988. "Investment, Financing Decisions, and Tax Policy," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 200-205, May.
  26. Conyon, M & Machin, Stephen, 1991. "The Determination of Profit Margins in UK Manufacturing," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 39(4), pages 569-82, June.
  27. Verbeek, Marno & Nijman, Theo, 1992. "Testing for Selectivity Bias in Panel Data Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(3), pages 681-703, August.
  28. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  29. Panicos O Demetriades & Kul B Luintel, 2000. "Financial Restraints in the South Korean Miracle," Discussion Papers in Economics, Department of Economics, University of Leicester 00/5, Department of Economics, University of Leicester.
  30. Baltagi, Badi H & Griffin, James M, 1989. "Alternative Models of Managerial Behavior: Empirical Tests for the Petroleum Industry," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 579-85, November.
  31. Auerbach, Alan J, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 93(3), pages 433-46, August.
  32. Koo, Chung Mo, 2002. "Fiscal sustainability in the wake of the economic crisis in Korea," Journal of Asian Economics, Elsevier, Elsevier, vol. 13(5), pages 659-669.
  33. Paul Geroski & Steve Machin & John Van Reenen, 1993. "The Profitability of Innovating Firms," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 198-211, Summer.
  34. Claessens, Stijn & Djankov, Simeon & Xu, Lixin Colin, 2000. "Corporate Performance in the East Asian Financial Crisis," World Bank Research Observer, World Bank Group, World Bank Group, vol. 15(1), pages 23-46, February.
  35. Bruce D. Smith & John H. Boyd, 1998. "The evolution of debt and equity markets in economic development," Economic Theory, Springer, Springer, vol. 12(3), pages 519-560.
  36. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  37. Green, David Jay, 2004. "Investment behavior and the Economic Crisis in Indonesia," Journal of Asian Economics, Elsevier, Elsevier, vol. 15(2), pages 287-303, April.
  38. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  39. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 1995. "Stock market development and firm financing choices," Policy Research Working Paper Series 1461, The World Bank.
  40. Khalid, Ahmed M. & Kawai, Masahiro, 2003. "Was financial market contagion the source of economic crisis in Asia?: Evidence using a multivariate VAR model," Journal of Asian Economics, Elsevier, Elsevier, vol. 14(1), pages 131-156, February.
  41. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 281-92, May.
  42. Doukas, John, 1995. "Overinvestment, Tobin's q and gains from foreign acquisitions," Journal of Banking & Finance, Elsevier, Elsevier, vol. 19(7), pages 1285-1303, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Nigel Driffield & Vidya Mahambare & Sarmistha Pal, 2004. "Dynamic Adjustment of Corporate Leverage: Is there a lesson to learn from the Recent Asian Crisis?," Finance, EconWPA 0405007, EconWPA.
  2. Nigel Driffield & Sarmistha Pal, 2008. "Evolution of Capital Strcture in East Asia: Corporate Inertia or Endeavours?," CEDI Discussion Paper Series, Centre for Economic Development and Institutions(CEDI), Brunel University 08-04, Centre for Economic Development and Institutions(CEDI), Brunel University.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpdc:0512021. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.