Financial Frictions, Investment, and Institutions

46 Pages Posted: 1 Feb 2011

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Kenichi Ueda

University of Tokyo - Faculty of Economics

Yishay Yafeh

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 2010

Abstract

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.

Keywords: Business cycles, Corporate governance, Corporate sector, Development, Economic growth, Economic models, Investment

Suggested Citation

Claessens, Stijn and Ueda, Kenichi and Yafeh, Yishay, Financial Frictions, Investment, and Institutions (October 2010). IMF Working Papers, Vol. , pp. 1-45, 2010. Available at SSRN: https://ssrn.com/abstract=1750720

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Kenichi Ueda

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

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)

London
United Kingdom

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