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Financial Conditions and Investment during the Transition: Evidence from Czech Firms

  • Lubomir Lizal

    (The William Davidson Institute at the University of Michigan Business School and CEPR)

  • Jan Svejnar

    (The William Davidson Institute at the University of Michigan Business School and CEPR)

In this paper, we examine net investment during the early stages of transition using micro data on the population of medium and large industrial firms in the Czech Republic during the 1992-95 period. We examine the relevance of alternative models of investment and test if investment behavior varies across categories of ownership and with the legal status of firms. Our analysis of depreciation leads us to the conclusion that replacement investment displays a similar pattern in many ownership-legal form categories of firms. Retained profit is found to be a major determinant of new investment and the estimate is statistically significant even when we use the most robust fixed effects estimates based on one-year differences. We find that enterprise profitability has a strong positive effect on investment in all types of firms except for privately owned-limited liability companies and foreign owned and mixed ownership firms. These results are consistent with the financing-hierarchy and credit-rationing hypotheses which indicate that domestic firms cannot easily borrow investment funds externally and that net investment varies with retained profits. Firms take into account various stock measures of internal finance. In particular, a stock of cash, receivables, receivables overdue, payables, and payables overdue systematically affect net investment.

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Paper provided by EconWPA in its series Development and Comp Systems with number 0012008.

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Length: 41 pages
Date of creation: 16 Feb 2001
Date of revision:
Handle: RePEc:wpa:wuwpdc:0012008
Note: Type of Document - Acrobat PDF; pages: 41 ; figures: included
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  1. Thornton, Judith, 1970. "Value-Added and Factor Productivity in Soviet Industry," American Economic Review, American Economic Association, vol. 60(5), pages 863-71, December.
  2. Blanchard, O. & Rhee, C. & Summers, L., 1990. "The Stock Market, Profit And Investment," RCER Working Papers 233, University of Rochester - Center for Economic Research (RCER).
  3. 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.
  4. Weitzman, Martin L., 1979. "Technology transfer to the USSR: An econometric analysis," Journal of Comparative Economics, Elsevier, vol. 3(2), pages 167-177, June.
  5. Lubomir Lizal, 2001. "Depreciation Rates in a Transition Economy: Evidence from Czech Panel Data," Microeconomics 0012004, EconWPA.
  6. Abel, Andrew B., 1980. "Empirical investment equations : An integrative framework," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 12(1), pages 39-91, January.
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  8. Shapiro, Matthew D, 1986. "The Dynamic Demand for Capital and Labor," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 513-42, August.
  9. Lubomir Lizal & Jan Svejnar, 1997. "Enterprise Investment During the Transition: Evidence from Czech Panel Data," William Davidson Institute Working Papers Series 60, William Davidson Institute at the University of Michigan.
  10. Terrell, Katherine, 1993. "Technical Change and Factor Bias in Polish Industry (1962-1983)," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 741-47, November.
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  13. Jorgenson, Dale W, 1971. "Econometric Studies of Investment Behavior: A Survey," Journal of Economic Literature, American Economic Association, vol. 9(4), pages 1111-47, December.
  14. Hayashi, Fumio & Inoue, Tohru, 1991. "The Relation between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms," Econometrica, Econometric Society, vol. 59(3), pages 731-53, May.
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  16. R. Glenn Hubbard & Anil K Kashyap & Toni M. Whited, 1993. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
  17. Bond, Stephen & Meghir, Costas, 1994. "Dynamic Investment Models and the Firm's Financial Policy," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 197-222, April.
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  19. Desai, Padma, 1976. "The Production Function and Technical Change in Postwar Soviet Industry: A Reexamination," American Economic Review, American Economic Association, vol. 66(3), pages 372-81, June.
  20. Nickell, Stephen J, 1977. "Uncertainty and Lags in the Investment Decisions of Firms," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 249-63, June.
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