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Journal of International Money and Finance
journal homepage: www.elsevier.com/locate/jimf
The impact of the ﬁnancial system’s structure on ﬁrms’ ﬁnancial constraints Christopher F. Baum a, b, *, Dorothea Schäfer b, c, Oleksandr Talavera d a
Department of Economics, Boston College, Chestnut Hill, MA 02467, USA DIW Berlin, Mohrenstraße 58, 10117 Berlin, Germany Jönköping International Business School, Jönköping, Sweden d School of Economics, University of East Anglia, Norwich NR4 7TJ, UK b c
a b s t r a c t
JEL classiﬁcation: G32 G30 Keywords: Financial constraints Financial structure Financial development Cash ﬂow sensitivity of cash
We estimate ﬁrms’ cash ﬂow sensitivity of cash to empirically test how the ﬁnancial system’s structure and level of development inﬂuence their ﬁnancial constraints. For this purpose we merge Almeida et al.’s work, a path-breaking design for evaluating a ﬁrm’s ﬁnancial constraints, with that of Levine, who paved the way for comparative analysis of ﬁnancial systems around the world. We conjecture that a country’s ﬁnancial system, both in terms of its structure and its level of development, should inﬂuence the cash ﬂow sensitivity of cash of constrained ﬁrms but leave unconstrained ﬁrms unaffected. We test our hypothesis with a large international sample of 30,000 ﬁrm-years from 1989 to 2006. Our ﬁndings reveal that both the structure of the ﬁnancial system and its level of development matter. Bank-based ﬁnancial systems provide constrained ﬁrms with easier access to external ﬁnancing. Ó 2011 Elsevier Ltd. All rights reserved.
1. Introduction For many years, ﬁnancial theory has stressed the role of ﬁnancial constraints on ﬁrms’ behavior, but it has rarely considered how obstacles to external ﬁnancing may vary across different ﬁnancial systems. Although stock markets can play a very important role in meeting ﬁrms’ ﬁnancing needs, a strong and solid banking system may be a workable alternative to meet ﬁrms’ external funding requirements. Different corporate governance systems, different regimes of investor protection, and different
* Corresponding author. Department of Economics, Boston College, Carney Hall 230, 140 Commonwealth Avenue, Chestnut Hill, MA 02467, USA. Tel.: þ1 617 552 3673; fax: þ1 617 552 2308. E-mail addresses: firstname.lastname@example.org (C.F. Baum), email@example.com (D. Schäfer), firstname.lastname@example.org (O. Talavera). 0261-5606/$ – see front matter Ó 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.jimonﬁn.2011.02.004
C.F. Baum et al. / Journal of International Money and Finance 30 (2011) 678–691
corporate ﬁnancing structures may all signiﬁcantly inﬂuence agency conﬂicts, recognized as obstacles to external ﬁnancing. Thus, the structure and the level of development of the ﬁnancial system of a speciﬁc country may be key determinants of the ﬁnancial constraints that its ﬁrms face. Anecdotal evidence documents signiﬁcant differences in the structure of the ﬁnancial macroeconomic environment. For instance, in 2006 the ratio of private credit by deposit money banks to GDP in Germany, 1.23, is 2.5 times higher than the same indicator in the USA, 0.48. Exactly the opposite is observed if we consider the stock market capitalization to GDP ratio for the same year: these indicators for USA and Germany equal 1.35 and 0.43, respectively. A natural question arises: in which countries are ﬁrms less likely to face obstacles in their access to external ﬁnancing? To address this issue, we begin by observing the liquidity policy of ﬁrms and relating it to the degree of ﬁnancial frictions they face. The traditional approach to measure ﬁnancial constraints in terms of ﬁrms’ investment–cash ﬂow sensitivity is quite controversial (e.g. Fazzari et al., 1988; Kaplan and Zingales, 1997). Therefore we follow the recently developed approach of Almeida et al. (2004), who consider a...