Financial Frictions, Investment, and Institutions

Author/Editor:

Yishay Yafeh ; Kenichi Ueda ; Stijn Claessens

Publication Date:

October 1, 2010

Electronic Access:

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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.

Series:

Working Paper No. 10/231

Subject:

English

Publication Date:

October 1, 2010

ISBN/ISSN:

9781455209316/1018-5941

Stock No:

WPIEA2010231

Format:

Paper

Pages:

45

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