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Financial Frictions, Investment, and Institutions

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  • Yishay Yafeh
  • Mr. Kenichi Ueda
  • Mr. Stijn Claessens

Abstract

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.

Suggested Citation

  • Yishay Yafeh & Mr. Kenichi Ueda & Mr. Stijn Claessens, 2010. "Financial Frictions, Investment, and Institutions," IMF Working Papers 2010/231, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2010/231
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    More about this item

    Keywords

    WP; external finance; rate of return; product market; Financial Friction; investment; institution; corporate governance; creditor rights; adjustment cost; required rate of return; inflation rate; investment decision; investment efficiency; cash flow; replacement cost; debt cost; investment adjustment cost; investment literature; costs of investment; Inv. Adj. cost; Financial frictions; Competition; Commodity markets; Stocks; Global;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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