Which Institutions Are Important for Firms Performance? Evidence from Bayesian Model Averaging Analysis

Using a rich dataset on individual firms in selected EU countries between 2005 and 2012, we document a surprisingly high share of assets tied in highly inefficient firms. Moreover, we discuss different channels through which institutions may affect firm financial developments and thus the long-run growth. Using Bayesian model averaging analysis, we discuss the importance of different types of economic, financial and political institutions. We show that high institutional quality improves the financial conditions of firms. However, too lax business regulations may worsen firms’ performance possibly due to excessive risk taking behavior.Key words: Institutional quality, Insolvency, Inefficient firms, Bayesian model averaging.JEL: C33, K23, O43. Korišćenjem bogatog skupa podataka o pojedinačnim preduzećima u odabranim zemljama EU u periodu od 2005. do 2012. godine evidentiramo iznenađujuće visok udeo sredstava vezanih za visoko neefikasna preduzeća. Štaviše, razmatramo različite kanale kroz koje institucije mogu uticati na finansijsku razvijenost preduzeća i time na dugoročni rast. Koristeći Bajesijanski model analize proseka, raspravljamo o značaju različitih vrsta ekonomskih, finansijskih i političkih institucija. Pokazaćemo da visoki institucionalni kvalitet poboljšava finansijske uslove preduzeća. Međutim, previše labavi poslovni propisi mogu pogoršati performanse preduzeća zbog prevelike tendencije ka preuzimanju rizika. Ključne reči: institucionalni kvalitet, nesolventnost, neefikasna preduzeća, Bajesijanski model analize poroseka.