Financial Frictions, Investment, and Institutions
Electronic Access:
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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.
Series:
Working Paper No. 2010/231
Subject:
Commodity markets Competition Corporate governance Economic sectors Economic theory Financial frictions Financial institutions Financial markets Stocks
English
Publication Date:
October 1, 2010
ISBN/ISSN:
9781455209316/1018-5941
Stock No:
WPIEA2010231
Pages:
45
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