Financial Conditions and Investment During the Transition: Evidence from Czech Firms

CERGE-EI Working Paper Series No. 153

Posted: 14 Jan 2010 Last revised: 29 Jan 2010

See all articles by Lubomir Lizal

Lubomir Lizal

Czech Technical University - Faculty of Electrical Engineering; Anglo-American University; Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences

Jan Svejnar

School of International and Public Affairs, Columbia University, NY, USA; CEPR; IZA; CERGE-EI; University of Ljubljana

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Date Written: March 1, 2000

Abstract

In this paper, we examine net investment during the early stages of transition using micro data on the population of medium and large industrial firms in the Czech Republic during the 1992-95 period. We examine the relevance of alternative models of investment and test if investment behavior varies across categories of ownership and with the legal status of firms. Our analysis of depreciation leads us to the conclusion that replacement investment displays a similar pattern in many ownership-legal form categories of firms. Retained profit is found to be a major determinant of new investment and the estimate is statistically significant even when we use the most robust fixed effects estimates based on one-year differences. We find that enterprise profitability has a strong positive effect on investment in all types of firms except for privately owned-limited liability companies and foreign owned and mixed ownership firms. These results are consistent with the financing-hierarchy and credit-rationing hypotheses which indicate that domestic firms cannot easily borrow investment funds externally and that net investment varies with retained profits. Firms take into account various stock measures of internal finance. In particular, a stock of cash, receivables, receivables overdue, payables, and payables overdue systematically affect net investment.

Keywords: Investment, cash-flow, restructuring, ownership, legal status, transition to a market economy

JEL Classification: E22, G32, P21, D21, D92

Suggested Citation

Lizal, Lubomir and Svejnar, Jan, Financial Conditions and Investment During the Transition: Evidence from Czech Firms (March 1, 2000). CERGE-EI Working Paper Series No. 153, Available at SSRN: https://ssrn.com/abstract=1535896 or http://dx.doi.org/10.2139/ssrn.1535896

Lubomir Lizal (Contact Author)

Czech Technical University - Faculty of Electrical Engineering ( email )

Technicka 2
Jug. Partyzanu 3
Prague 6, 166 27
Czech Republic

Anglo-American University ( email )

Lazenska 4
11800 Praha 1
Prague 1, 11800
Czech Republic

Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences ( email )

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Prague, 111 21
Czech Republic
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HOME PAGE: http://www.cerge-ei.cz

Jan Svejnar

School of International and Public Affairs, Columbia University, NY, USA ( email )

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CEPR

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United Kingdom

IZA

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Germany

CERGE-EI

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University of Ljubljana ( email )

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Slovenia

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