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Financial Frictions, Investment, and Institutions

  • Yishay Yafeh
  • Kenichi Ueda
  • Stijn Claessens

Financial frictions have been identified as key factors affecting economic fluctuations and growth. But, can institutional reforms reduce financial frictions? Based on a canonical investment model, we consider two potential channels: (i) financial transaction costs at the firm level; and (ii) required return at the country level. We empirically investigate the effects of institutions on these financial frictions using a panel of 75,000 firm-years across 48 countries for the period 1990 - 2007. We find that improved corporate governance (e.g., less informational problems) and enhanced contractual enforcement reduce financial frictions, while stronger creditor rights (e.g., lower collateral constraints) are less important.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/231.

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Length: 45
Date of creation: 01 Oct 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/231
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