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Investment and Institutions

  • Yishay Yafeh

    (Hebrew University)

  • Kenichi Ueda

    (IMF)

  • Stijn Claessens

    (IMF)

We study how financial systems and institutional environments affect investment efficiency using a sample of some 300,000 firm-years from 48 countries. Based on a canonical investment model, we identify two possible channels by which institutional environments may affect investment: firm-level financial frictions and the macro-level required rate of return. We find that a good institutional environment, in particular strong corporate governance, reduces financial frictions and lowers the required rate of return, thereby enhancing efficiency in capital allocation. This result is broadly consistent with previous literature, but the mechanism identified here is novel and more precise.

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File URL: https://economicdynamics.org/meetpapers/2010/paper_513.pdf
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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 513.

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Date of creation: 2010
Handle: RePEc:red:sed010:513
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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