Investment Decisions and the Soft Budget Constraint

28 Pages Posted: 8 May 2006

See all articles by Emilio Colombo

Emilio Colombo

Catholic University of the Sacred Heart of Milan

Luca Stanca

University of Milan, Bicocca - Department of Economics; Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS); Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS)

Abstract

This paper investigates the investment behaviour of a large panel of Hungarian firms in the period 1989-99, in order to assess the impact of institutional and regulatory changes on the efficiency of credit allocation. We find that the role of financial factors for investment decisions has changed significantly after the introduction of major financial reforms, and that firms were affected differently depending on their ownership type. Reforms have hardened the budget constraint of private domestic firms, particularly small ones, and reduced informational problems for foreign-owned firms. State-owned firms remained subject to a soft budget constraint. In particular, small state firms became more sensitive to financial conditions, whereas large state firms were unaffected and kept operating under a soft budget constraint.

Suggested Citation

Colombo, Emilio and Stanca, Luca, Investment Decisions and the Soft Budget Constraint. Economics of Transition, Vol. 14, No. 1, pp. 171-198, January 2006. Available at SSRN: https://ssrn.com/abstract=878807 or http://dx.doi.org/10.1111/j.1468-0351.2006.00238.x

Emilio Colombo

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Luca Stanca (Contact Author)

University of Milan, Bicocca - Department of Economics ( email )

Piazza dell'Ateneo, Nuovo I
Milan 20126
Italy

Università degli Studi di Milano-Bicocca - Center for Interdisciplinary Studies in Economics, Psychology & Social Sciences (CISEPS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milano, 20126
Italy

Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )

Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy

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