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An alternative method for measuring financial frictions

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  • Uluc Aysun

    (University of Connecticut)

Abstract

Costly state verification models predict that the sensitivity of borrowing costs to financial leverage is positively related to the level of state verification costs (financial frictions). This paper constructs a measure of financial frictions that is consistent with this prediction of theory. Using bond deals from 47 countries, financial frictions are captured as the sensitivity of bond spreads to the issuing firms' financial leverage. This dynamic measure of financial frictions provides new insights into three characteristics of financial frictions. 1) In contrast to the inferences from widely-used measures, financial frictions display a large degree of variability, and have decreased over time. 2) The effect of financial frictions on private credit supply has decreased both in significance and magnitude over time. 3) Bankruptcy reforms, in general have not been effective in improving creditor/borrower rights.

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  • Uluc Aysun, 2009. "An alternative method for measuring financial frictions," Working papers 2009-34, University of Connecticut, Department of Economics.
    • Handle: RePEc:uct:uconnp:2009-34
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    Cited by:

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    More about this item

    Keywords

    financial frictions; leverage sensitivity; financial accelerator; bond deals.;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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