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Capital market imperfections before and after financial liberalization : a Euler Equation approach to panel data for Ecuadorian firms

  • Jaramillo, Fidel
  • Schiantarelli, Fabio
  • Weiss, Andrew

Using a large set of panel data for Ecuadorian firms, the authors analyze the role of capital market imperfections in investment decisions and investigate whether the financial reforms introduced in the 1980s in Ecuador succeeded in relaxing financial constraints. To facilitate capital accumulation and growth, the Ecuadorian government removed administrative controls on the interest rate and eliminated or scaled down directed credit programs. The model used here allows both for an increasing cost of borrowing, as the degree of leverage increases, and for a ceiling on leverage. The econometric results suggest that both types of capital market imperfections are important for small and young firms, but not for large and old firms. Moreover, the estimated equations do not provide evidence that financial reform in Ecuador has helped to relax these financial constraints.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1091.

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Date of creation: 28 Feb 1993
Date of revision:
Handle: RePEc:wbk:wbrwps:1091
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  5. Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 233-257.
  6. Galeotti, Marzion & Schiantarelli, Fabio, 1991. "Variable Markups in a Model with Adjustment Costs: Econometric Evidence for U.S. Industry," Working Papers 91-44, C.V. Starr Center for Applied Economics, New York University.
  7. Charles W. Calomiris & R. Glenn Hubbard, 1988. "Firm Heterogeneity, Internal Finance, and `Credit Rationing'," NBER Working Papers 2497, National Bureau of Economic Research, Inc.
  8. Morisset, Jacques, 1993. "Does financial liberalization really improve private investment in developing countries?," Journal of Development Economics, Elsevier, vol. 40(1), pages 133-150, February.
  9. Mark Gertler & R. Glenn Hubbard & Anil K. Kashyap, 1990. "Interest rate spreads, credit constraints and investment fluctuations: an empirical investigation," Finance and Economics Discussion Series 137, Board of Governors of the Federal Reserve System (U.S.).
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  11. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  12. Harris, John R & Schiantarelli, Fabio & Siregar, Miranda G, 1994. "The Effect of Financial Liberalization on the Capital Structure and Investment Decisions of Indonesian Manufacturing Establishments," World Bank Economic Review, World Bank Group, vol. 8(1), pages 17-47, January.
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  16. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  17. Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-60, September.
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  21. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
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  23. Ijaz Nabi, 1989. "Investment in Segmented Capital Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 453-462.
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