Institutions, Financial Frictions, and Investment: Estimation with Structural Restrictions

58 Pages Posted: 12 May 2012

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)

Date Written: May 7, 2012

Abstract

We investigate the relations among country-specific institutions, financial frictions, and firm-level investment decisions. Imposing structural restrictions, we consider the effects of institutions (such as shareholder and creditor rights) on firm investment through two channels: the cost of capital at the firm (micro) level; and the required rate of return at the country (macro) level. Using a panel of 75,000 firm-years from 48 countries for the period 1990-2007, we find that: (i) country-level institutions affect firms’ investment behavior; (ii) shareholder rights affect financial frictions and investment more than other institutions (e.g., product market competition, creditor rights) do; and (iii) effects are especially pronounced for small firms with large financing needs, suggesting that stronger shareholder rights lead to a more efficient allocation of capital.

Keywords: Financial friction, investment, Tobin’s Q, institutions, investor protection

JEL Classification: G30, O16, O43

Suggested Citation

Claessens, Stijn and Ueda, Kenichi and Yafeh, Yishay, Institutions, Financial Frictions, and Investment: Estimation with Structural Restrictions (May 7, 2012). Available at SSRN: https://ssrn.com/abstract=2056486 or http://dx.doi.org/10.2139/ssrn.2056486

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Kenichi Ueda (Contact Author)

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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