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Investment decisions and the soft budget constraint: evidence from Hungarian manufacturing firms

  • Colombo, Emilio
  • Stanca, Luca

This paper investigates the investment behaviour of a large panel of Hungarian firms in the period 1989–99, in order to assess the impact of institutional and regulatory changes on the efficiency of credit allocation. We find that the role of financial factors for investment decisions has changed significantly after the introduction of major financial reforms, and that firms were affected differently depending on their ownership type. Reforms have hardened the budget constraint of private domestic firms, particularly small ones, and reduced informational problems for foreign-owned firms. State-owned firms remained subject to a soft budget constraint. In particular, small state firms became more sensitive to financial conditions, whereas large state firms were unaffected and kept operating under a soft budget constraint.

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File URL: https://mpra.ub.uni-muenchen.de/18708/1/MPRA_paper_18708.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18708.

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Date of creation: 2006
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Publication status: Published in The Economics of Transition 14.1(2006): pp. 171-198
Handle: RePEc:pra:mprapa:18708
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