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The impact of the financial system's structure on firms' financial constraints

  • Baum, Christopher F.
  • Schäfer, Dorothea
  • Talavera, Oleksandr

We estimate firms' cash flow sensitivity of cash to empirically test how the financial system's structure and level of development influence their financial constraints. For this purpose we merge Almeida et al.'s work, a path-breaking design for evaluating a firm's financial constraints, with that of Levine, 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, should influence the cash flow sensitivity of cash of constrained firms but leave unconstrained firms unaffected. We test our hypothesis with a large international sample of 30,000 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 constrained firms with easier access to external financing.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 30 (2011)
Issue (Month): 4 (June)
Pages: 678-691

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Handle: RePEc:eee:jimfin:v:30:y:2011:i:4:p:678-691
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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  6. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 2000. "Investment-Cash Flow Sensitivities are Useful: A Comment on Kaplan and Zingales," The Quarterly Journal of Economics, Oxford University Press, vol. 115(2), pages 695-705.
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