Abstract

http://ssrn.com/abstract=1742695
 
 

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Financial Frictions, Investment, and Institutions


Stijn Claessens


International Monetary Fund (IMF); University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR); Tinbergen Institute; European Corporate Governance Institute (ECGI)

Kenichi Ueda


International Monetary Fund (IMF)

Yishay Yafeh


Hebrew University of Jerusalem - Jerusalem School of Business Administration; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

December 2010

CEPR Discussion Paper No. DP8170

Abstract:     
Financial frictions have been identified as key factors affecting both short-term economic fluctuations and long-term growth. An important policy question therefore is whether institutional reforms can reduce financial frictions and, if so, which reforms are best? We address this question by empirically investigating the effects of institutions on financial frictions using a canonical investment model. We consider two channels by which frictions affect investment: (i) through financial transaction costs at the individual firm (micro) level; and (ii) through the required rate of return at the country (macro) level. Using a panel of 75,000 firm-years across 48 countries for the period 1990-2007, we examine how, through these frictions, institutions affect investment. We find that improved corporate governance (e.g., less severe informational problems) and enhanced contractual enforcement reduce financial frictions affecting investment, while stronger creditor rights (e.g., lower collateral constraints) are less important.

Number of Pages in PDF File: 47

Keywords: corporate governance, creditor rights, Financial friction, institutions, investment

JEL Classification: G30, O16, O43

working papers series


Date posted: January 18, 2011  

Suggested Citation

Claessens, Stijn and Ueda, Kenichi and Yafeh, Yishay, Financial Frictions, Investment, and Institutions (December 2010). CEPR Discussion Paper No. DP8170. Available at SSRN: http://ssrn.com/abstract=1742695

Contact Information

Stijn Claessens (Contact Author)
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
202-623-7641 (Phone)
202-5897641 (Fax)
University of Amsterdam - Finance Group ( email )
Roetersstraat 18
Amsterdam, 1018 WB
Netherlands
+31 20 525 6020 (Phone)
+31 20 525 5285 (Fax)
HOME PAGE: http://www.fee.uva.nl/fm/index.htm
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Tinbergen Institute ( email )
Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Kenichi Ueda
International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
Yishay Yafeh
Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )
Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3081 (Phone)
+972 2 588 1341 (Fax)
HOME PAGE: http://bschool.huji.ac.il/facultye/yafeh/
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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Citations:  3
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