He Impact of the Financial System S Structure on Firms Financial Constraints

Topics: Investment, Finance, Ratio Pages: 28 (9018 words) Published: April 3, 2013
Journal of International Money and Finance 30 (2011) 678–691

Contents lists available at ScienceDirect

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: baum@bc.edu (C.F. Baum), dschaefer@diw.de (D. Schäfer), s.talavera@uea.ac.uk (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...

References: Acharya, V.V., Almeida, H., Campello, M., October 2007. Is cash negative debt? A hedging perspective on corporate financial policies. Journal of Financial Intermediation 16 (4), 515–554. Allen, F., Gale, D., 2000. Comparing Financial Systems. MIT Press. Almeida, H., Campello, M., 2002. Financial Constraints and Investment-cash Flow Sensitivities: New Research Directions. Working paper. New York University. Almeida, H., Campello, M., Weisbach, M., 2004. The cash flow sensitivity of cash. Journal of Finance 59 (4), 1777–1804. Beck, T., Demirgüç-Kunt, A., Levine, R., 2000. A new database on financial development and structure. World Bank Economic Review 14, 597–605. Beck, T., Demirgüç-Kunt, A., Maksimovic, V., 02 2005. Financial and legal constraints to growth: does firm size matter? Journal of Finance 60 (1), 137–177. Bond, S., Elston, J.A., Mairesse, J., Mulkay, B., 09 2003. Financial factors and investment in Belgium, France, Germany, and the United Kingdom: a comparison using company panel data. The Review of Economics and Statistics 85 (1), 153–165. Bond, S., Harhoff, D., Reenen, J.V., 1999. Investment, R&D and Financial Constraints in Britain and Germany. Working Papers WP99/5. Institute for Fiscal Studies. Chakraborty, S., Ray, T., March 2006. Bank-based versus market-based financial systems: a growth-theoretic analysis. Journal of Monetary Economics 53 (2), 329–350. Cleary, S., 04 1999. The relationship between firm investment and financial status. Journal of Finance 54 (2), 673–692. Cummings, J.G., Hassett, K.A., Oliner, S.D., June 2006. Investment behavior, observable expectations, and internal funds. American Economic Review 96 (3), 796–810. Demirgüç-Kunt, A., Maksimovic, V., September 2002. Funding growth in bank-based and market-based financial systems: evidence from firm-level data. Journal of Financial Economics 65 (3), 337–363. Fazzari, S., Hubbard, R.G., Petersen, B.C., 1988. Financing constraints and corporate investment. Brookings Papers on Economic Activity 78 (2), 141–195. Fazzari, S.M., Hubbard, R.G., Petersen, B.C., May 2000. Investment-cash flow sensitivities are useful: a comment on Kaplan and Zingales. The Quarterly Journal of Economics 115 (2), 695–705. Gilchrist, S., Himmelberg, C., 1996. Evidence on the role of cash flow for investment. Journal of Monetary Economics 36, 541– 572. Gomes, J.F., December 2001. Financing investment. American Economic Review 91 (5), 1263–1285. Harford, J., December 1999. Corporate cash reserves and acquisitions. Journal of Finance 54 (6), 1969–1997. Hoshi, T., Kashyap, A., Scharfstein, D., February 1991. Corporate structure, liquidity, and investment: evidence from Japanese industrial groups. The Quarterly Journal of Economics 106 (1), 33–60. Kaplan, S.N., Zingales, L., 1997. Do investment-cash flow sensitivities provide useful measures of financing constraints. Quarterly Journal of Economics 107 (1), 196–215. Kaplan, S.N., Zingales, L., May 2000. Investment-cash flow sensitivities are not valid measures of financing constraints. The Quarterly Journal of Economics 115 (2), 707–712. Khurana, I.K., Martin, X., Pereira, R., 2006. Financial development and the cash flow sensitivity of cash. Journal of Financial and Quantitative Analysis 41 (04), 787–808. Kim, Chang-Soo, Mauer, D.C., Sherman, A.E., 1998. The determinants of corporate liquidity: theory and evidence. Journal of Financial and Quantitative Analysis 33, 335–359. Levine, R., October 2002. Bank-based or market-based financial systems: which is better? Journal of Financial Intermediation 11 (4), 398–428. Love, I., 2003. Financial development and financing constraints: international evidence from the structural investment model. Review of Financial Studies 16, 765–791. Mairesse, J., Hall, B.H., Mulkay, B., Dec 1999. Firm-level Investment in France and the United States: An Exploration of What We Have Learned in Twenty Years. Nber working papers. National Bureau of Economic Research, Inc. Moyen, N., October 2004. Investment–cash flow sensitivities: constrained versus unconstrained firms. Journal of Finance 59 (5), 2061–2092. Myers, S.C., 1977. Determinants of corporate borrowing. Journal of Financial Economics 25, 25–43. Opler, T., Pinkowitz, L., Stulz, R., Williamson, R., 1999. The determinants and implications of cash holdings. Journal of Financial Economics 52, 3–46.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • financial Essay
  • Financial information system Essay
  • Financial Impacts and Constraints Essay
  • financial analysis Essay
  • Financial Systems Syllabus Essay
  • Financial Systems Essay
  • Financial System Essay
  • Financial System Essay

Become a StudyMode Member

Sign Up - It's Free