Financial Frictions, Investment, and Institutions

By Yishay Yafeh, Kenichi Ueda, Stijn Claessens

October 1, 2010

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Yishay Yafeh, Kenichi Ueda, and Stijn Claessens. Financial Frictions, Investment, and Institutions, (USA: International Monetary Fund, 2010) accessed September 27, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Financial frictions have been identified as key factors affecting economic fluctuations and growth. But, can institutional reforms reduce financial frictions? Based on a canonical investment model, we consider two potential channels: (i) financial transaction costs at the firm level; and (ii) required return at the country level. We empirically investigate the effects of institutions on these financial frictions using a panel of 75,000 firm-years across 48 countries for the period 1990 - 2007. We find that improved corporate governance (e.g., less informational problems) and enhanced contractual enforcement reduce financial frictions, while stronger creditor rights (e.g., lower collateral constraints) are less important.

Subject: Commodity markets, Competition, Corporate governance, Economic sectors, Economic theory, Financial frictions, Financial institutions, Financial markets, Stocks

Keywords: Adjustment cost, Cash flow, Commodity markets, Competition, Corporate governance, Costs of investment, Creditor rights, Debt cost, External finance, Financial Friction, Financial frictions, Global, Inflation rate, Institution, Inv. Adj. cost, Investment, Investment adjustment cost, Investment decision, Investment efficiency, Investment literature, Product market, Rate of return, Replacement cost, Required rate of return, Stocks, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2010/231
Stock No:

WPIEA2010231
ISBN:

9781455209316
ISSN:

1018-5941

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