Financial constraints and investment: a critical review of methodological issues and international evidence

Investments ; Business enterprises ; Econometric models ; Credit

Access to Long Term Debt and Effects on Firms' Performance: Lessons from Ecuador

This paper documents the maturity structure of firms` debt in Ecuador and discusses how it has been affected by government intervention in credit markets and by financial liberalization. Using firm-level panel data, we then investigate the determinants of access to long-term debt. Finally, we provide evidence on the impact of the maturity structure of debt on firms` performance, in particular on productivity and capital accumulation.

Form of ownership and financial constraints : panel data evidence from leverage and investment equations

The authors analyze whether form of ownership affects the substitutability of internal and external sources of finance. In particular, they test whether financial constraints are more severe for independent firms, and whether members of large national business groups suffer different constraints than subsidiaries of foreign multinational corporations. The results for leverage and investment equations estimated for a panel of Italian companies suggest that: a) independent firms face more severe financial constraints than other firms do; and b) members of national groups and subsidiaries of multinational corporations are not oversensitive to cash flow in their investment decisions. But leverage equations suggest interesting differences between the two groups. In particular, agency costs arising from the conflict between managers and shareholders are more important for subsidiaries of multinational corporations.Economic Theory&Research,Payment Systems&Infrastructure,Microfinance,International Terrorism&Counterterrorism,Banks&Banking Reform,Economic Theory&Research,International Terrorism&Counterterrorism,Banks&Banking Reform,Small Scale Enterprise,Microfinance

Debt maturity and firm performance : a panel study of Indian companies

Economic policy makers traditionally hold the view that, because of imperfections in capital markets, a shortage of long-term finance acts as a barrier to industrial performance and growth. Long term finance is thought to allow firms to invest in more productive technologies, even when they do not produce immediate payoffs, without fear of premature liquidation. As a result, special state-supported term-lending institutions have been established, especially in developing countries. But some believe that short-term finance may offer better incentives because it allows suppliers of finance to monitor and control firms more effectively, thus improving the firms'performance. The authors empirically investigate the determinants and consequences of the term structure of debt. Using a rich panel of data on privately owned companies in India, they also examine the influence of debt maturity structures on those firm's performance, especially on productivity. The results are not conclusive, but seem to support conventional beliefs about the importance of long term finance to firm performance. Heavy leveraging, however, has a strong negative impact on productivity. They base their econometric evidence on estimates of a maturity equation and of a production function augmented by financial variables. The data on which these results are based have been generated by a financial system in which there is little competition, in which state-owned financial institutions are not guided by the profit motive and have no control over interest rates, so one cannot say whether short term finance would have been more beneficial in a less regulated system. Moreover, by the end of the 1980s, the capital base of India's government-owned financial institutions had been severely eroded and they carried a heavy burden of nonperforming assets. This means that the benefits of long term finance must be weighed against the costs.Banks&Banking Reform,Financial Intermediation,Economic Theory&Research,Municipal Financial Management,Environmental Economics&Policies

The maturity structure of debt : determinants and effects on firms'performance - evidence from the United Kingdom and Italy

The authors empirically investigate the determinants and consequences of the maturity structure of debt, using data from a panel of UK and Italian firms. They find that in choosing a maturity structure for debt, firms'tend to match assets and liabilities. They conclude that more profitable firms'(as measured bythe ratio of cash flow to capital) tend to have more long-term debt. The data do not support the hypothesis that short-term debt, through better monitoring and control, boosts efficiency and growth -rather, the opposite can be concluded. In both countries, the data suggest a positive relationship between initial debt maturity and the firms'subsequent medium-term performance (i.e., profitability and growth in real sales). In both countries total factor productivity (TFP) depends positively on the length of debt maturity when the maturity variable is entered both contemporaneously and lagged. But in Italy the positive effect of the length of maturity on productivity is substantially reduced or even reversed when the proportion of subsidized credit increases. The authors: document the relationship between firms'characteristics and their choice of shorter or long-term debt by estimating a maturity equation and interpreting the results in light of insights from theoretical literature, and by analyzing the effects of maturity on firms'later performance in terms of profitability, growth, and productivity; assess how TFP depends on the degree of leverage and the proportion of longer and shorter-term debt; and analyze the relationship between firms'debt maturity and investment.Municipal Financial Management,Financial Intermediation,Payment Systems&Infrastructure,Economic Theory&Research,Banks&Banking Reform,Economic Theory&Research,Municipal Financial Management,Banks&Banking Reform,Environmental Economics&Policies,Financial Intermediation

Access to long term debt and effects of firm's performance : lessons from Ecudaor

Recent theory increasingly emphasizes the association of short-term debt with higher-quality firms and better incentives. The possibility of premature liquidation, for example, may serve as a disciplinary device to improve firm performance. At the same time the role of long-term debt, especially when it is heavily subsidized, is being rethought because so many development banks are plagued with nonperforming loans and doubts about the selection criteria used in allocating funds. The authors explore empirical evidence about the structure of debt maturity in Ecuadorian firms. They discuss how it has been affected by government intervention in credit markets, and by financial liberalization. Using firm panel data, they investigate the determinants of access to long-term debt in Ecuador. Finally, they provide evidence about how the maturity structure of debt affects firms'performance, particularly productivity and capital accumulation. They find that: a) long-term debt is very unevenly distributed; b) large firms are more likely to have access to long term debt than small firms and are on average more profitable; c) conditional on size, operating profits do not increase probability of receiving long-term credit and may actually decrease it, suggesting that the mechanism used to allocate long-term resources in Ecuador may be flawed; d) the allocation problem was worse for directed credit, though there is evidence this problem was less severe after financial liberalization; e) there is a strong positive association between asset maturity and debt maturity, a matching of assets and liabilities; f) shorter-term loans are not conducive to greater productivity, while long-term loans may lead to improvements in productivity; and g) while long-term loans may positively affect the quality of capital accumulation, they do not have an impact on the amount of fixed investment.Economic Theory&Research,Payment Systems&Infrastructure,Environmental Economics&Policies,Banks&Banking Reform,Strategic Debt Management,Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Strategic Debt Management,Financial Intermediation

Credit Constraints in Latin America: An Overview of the Micro Evidence

This paper summarizes and discusses new evidence on the nature, extent, evolution and consequences of financing constraints in Latin America; this evidence is drawn from a recent series of papers. The countries covered are Argentina, Colombia, Costa Rica, Ecuador, Mexico, and Uruguay. All the new contributions share the characteristics of being based on micro data. Most of the data sources are firms’ balance sheets. For Argentina information on debt contracts and credit history is also available, while for Costa Rica personal information on entrepreneurs was also collected. Some of the papers investigate the determinants of firms’ financing choices, and the consequences of access or debt composition on performance. Other papers attempt to assess the severity of financing constraints, by focusing on firms’ investment choices. All the papers (but one) were part of the project “Determinants and Consequences of Financial Constraints Facing Firms in Latin America and the Caribbean,” financed by the IADB. However, other recent micro-econometric contributions are discussed as well. The results suggest that access to credit (and its cost) depends not only upon favorable balance sheet characteristics, but also upon the closeness of the relationship between firms and banks as well as credit history. Access to long-term loans and to loans denominated in foreign currency is positively related to the size and tangibility of firms’ assets and negatively related to measures of country risk. Moreover, firms that have foreign participation appear to be less financially constrained in their investment decisions. The same is true for firms that are associated with business groups. On the whole, it appears that financial liberalization tends to relax financial constraints for firms that were previously constrained, while financial crises tighten them. However, firms that have more access to external sources of finance via, for instance, exports or ownership links, appear to suffer less in the post-crisis period. The paper concludes with a discussion of the policy implications of these results.

Investment, Finacial Factors and Cash Flow: Evidence From UK Panel Data

In this paper we provide some econometric evidence on the impact of financial factors like cash flow, debt and stock measures of liquidity on the investment decisions of U. K. firms. These variables are introduced via an extension of the Q model of investment which explicitly includes agency/financial distress costs. We discuss if the significance of cash flow may be due to the fact that it proxies for output or because it is a better measure of market fundamentals than Q. Moreover we investigate if the effect of financial factors varies across different types of firms, according to size, age, and type of industry (growing and declining). We analyze the determinants of the magnitude of the cash flow effect and explain why caution must be exercised in attributing inter-firm differences only to differences in the importance of agency or financial distress costs.

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

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.Economic Theory&Research,Banks&Banking Reform,Environmental Economics&Policies,International Terrorism&Counterterrorism,Financial Intermediation