Financial Frictions, Investment, and Institutions
47 Pages Posted: 18 Jan 2011
There are 2 versions of this paper
Financial Frictions, Investment, and Institutions
Date Written: December 2010
Abstract
Financial frictions have been identified as key factors affecting both short-term economic fluctuations and long-term growth. An important policy question therefore is whether institutional reforms can reduce financial frictions and, if so, which reforms are best? We address this question by empirically investigating the effects of institutions on financial frictions using a canonical investment model. We consider two channels by which frictions affect investment: (i) through financial transaction costs at the individual firm (micro) level; and (ii) through the required rate of return at the country (macro) level. Using a panel of 75,000 firm-years across 48 countries for the period 1990-2007, we examine how, through these frictions, institutions affect investment. We find that improved corporate governance (e.g., less severe informational problems) and enhanced contractual enforcement reduce financial frictions affecting investment, while stronger creditor rights (e.g., lower collateral constraints) are less important.
Keywords: corporate governance, creditor rights, Financial friction, institutions, investment
JEL Classification: G30, O16, O43
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Political Rights and the Cost of Debt
By Yaxuan Qi, John K. Wald, ...
-
Property Rights Protection, Corporate Transparency, and Growth
By Art Durnev, Vihang R. Errunza, ...
-
Property Rights Protection, Corporate Transparency, and Growth
By Art Durnev, Vihang R. Errunza, ...
-
Is Political Risk Company-Specific? The Market Side of the Yukos Affair
By Alexei Goriaev and Konstantin Sonin
-
How Legal Environments Affect the Use of Bond Covenants
By Yaxuan Qi, Lukas Roth, ...
-
Expropriation Risk and Firm Growth: A Corporate Transparency Channel
By Art Durnev and Sergei Guriev
-
Expropriation Risk and Firm Growth: A Corporate Transparency Channel
By Art Durnev and Sergei Guriev
-
The Resource Curse: A Corporate Transparency Channel
By Art Durnev and Sergei Guriev
-
The Dynamic Volume-Return Relationship of Individual Stocks: The International Evidence
By Louis Gagnon, George Andrew Karolyi, ...