Financial Market Imperfections and Corporate Decisions
Lessons from the Transition Process in Hungary
Erschienen am 27. Januar 2006
X, 174 Seiten
978-3-7908-1671-6 (ISBN)
Beschreibung
We would like to thank Akos Valentinyi and Mark Schaffer for their advice on various stages of this research project. We also would like to thank our col leagues at the Department of Economics of the University of Milan - Bicocca for their advice and support. This book is the result of a long term project financed by various research grants: in particular the Phare-Ace programme (Project P-96-6151-R) and a research grant from the Italian Ministry of Education under the young researchers scheme. Milan, March 2005 Emilio Colombo Luca Stanca Contents Introduction 1 Financial market imperfections and corporate decisions: theory and evidence 7 2. 1 Introduction 7 2. 2 Financial market imperfections, investment and cycles 9 2. 2. 1 The Stiglitz view 9 2. 2. 2 Agency costs and macroeconomic fluctuations 15 2. 2. 3 Assessing the differences 18 2. 2. 4 Further developments 20 2. 2. 5 Empirical evidence 22 2. 3 Financial market imperfections and corporate capital structure 24 2. 3. 1 Asymmetric information and capital structure choice . . 25 2. 3. 2 Agency costs and capital structure choice 30 2. 3. 3 Empirical evidence 32 The transformation of the Hungarian financial system 35 3. 1 Introduction 35 3. 2 Macroeconomic background 36 3. 3 Liberalisation, privatisation and financial development 44 3. 3. 1 Banking and credit 45 3. 3. 2 Equity market 48 3. 3. 3 Foreign direct investment 49 3. 4 Financial sector reform 50 3. 4.
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Emilio Colombo | Luca Stanca
Financial Market Imperfections and Corporate Decisions
Lessons from the Transition Process in Hungary
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09/2005
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Inhalt
Financial market imperfections and corporate decisions: theory and evidence.- The transformation of the Hungarian financial system.- Patterns of corporate financial positions.- The determinants of corporate capital structure.- Financial constraints and investment decisions.- Conclusions.
5 The determinants of corporate capital structure (S.105)
5.1 Introduction
Following the descriptive analysis of financial ratios in the previous chapter, this chapter investigates the determinants of corporate capital structure and, in particular, bank debt. This analysis also aims at revealing the existence of constraints on firms' choices, thus providing information on the degree of imperfections that characterise credit and financial markets in Hungary. It should be noted, however, that our analysis does not represent a direct a test for the presence of financial market imperfections.
It is rather an empirical investigation of firms' capital structure that can indirectly reveal the presence of such imperfections. The empirical literature on capital structure choice is vast, mainly referring to industrialised countries (see e.g. Titman and Wessels (1988) and Rajan and Zingales (1995)), but also to Eastern European economies: Cornelli et al. (1998) for Hungary and Poland, Revoltella (1998) for the Czech Republic, and Carare and Perotti (1997) for Romania.
Nevertheless, while in all the above mentioned works the analysis is conducted on cross-section data, we analyse panel data spanning over 10 years of the transition process. The panel structure of the data set and the size of both the sectional and time dimensions can considerably improve our understanding of the determinants of firms' capital structure in transition economies.
The chapter is organised as follows: Sec. 5.2 introduces the theoretical framework. Sec. 5.3 describes the data set and provides some descriptive statistics, Sec. 5.4 discusses the methodology, and Sec. 5.5 presents the results.
5.2 The theory
As emphasised in chapter 2, the analysis of corporate capital structure assumes relevance mainly in the presence of financial market imperfections. It is because of such imperfections that different financing methods become imperfect substitutes and determine the existence of an optimal capital structure. We have also argued that there are two good reasons why these imperfections are likely to be particularly severe in Eastern Europe.
The first is that in the planned system, banks did not carry out monitoring or risk assessment activities: they were lending to firms what was stated in the plan, but they were not actually concerned with the creditworthiness of the borrower, given that the solvency of the whole system was guaranteed by the state. As a consequence, even if there existed a relationship between borrowers and lenders, this relationship was largely uninformative. With the beginning of transition, lenders had to learn to be concerned about the creditworthiness of borrowers. However, on the one hand the former did not have any experience in monitoring activity, and on the other hand the latter did not have a credit history or reputation to rely on.
The second reason is the economic instability that characterised the early stages of transition. In an unstable economic system, current performance is a poor indicator of future performance. Therefore, not only borrowers did not have a reputation deriving from the past, but they also had great difficulties in building one ex novo.
5.1 Introduction
Following the descriptive analysis of financial ratios in the previous chapter, this chapter investigates the determinants of corporate capital structure and, in particular, bank debt. This analysis also aims at revealing the existence of constraints on firms' choices, thus providing information on the degree of imperfections that characterise credit and financial markets in Hungary. It should be noted, however, that our analysis does not represent a direct a test for the presence of financial market imperfections.
It is rather an empirical investigation of firms' capital structure that can indirectly reveal the presence of such imperfections. The empirical literature on capital structure choice is vast, mainly referring to industrialised countries (see e.g. Titman and Wessels (1988) and Rajan and Zingales (1995)), but also to Eastern European economies: Cornelli et al. (1998) for Hungary and Poland, Revoltella (1998) for the Czech Republic, and Carare and Perotti (1997) for Romania.
Nevertheless, while in all the above mentioned works the analysis is conducted on cross-section data, we analyse panel data spanning over 10 years of the transition process. The panel structure of the data set and the size of both the sectional and time dimensions can considerably improve our understanding of the determinants of firms' capital structure in transition economies.
The chapter is organised as follows: Sec. 5.2 introduces the theoretical framework. Sec. 5.3 describes the data set and provides some descriptive statistics, Sec. 5.4 discusses the methodology, and Sec. 5.5 presents the results.
5.2 The theory
As emphasised in chapter 2, the analysis of corporate capital structure assumes relevance mainly in the presence of financial market imperfections. It is because of such imperfections that different financing methods become imperfect substitutes and determine the existence of an optimal capital structure. We have also argued that there are two good reasons why these imperfections are likely to be particularly severe in Eastern Europe.
The first is that in the planned system, banks did not carry out monitoring or risk assessment activities: they were lending to firms what was stated in the plan, but they were not actually concerned with the creditworthiness of the borrower, given that the solvency of the whole system was guaranteed by the state. As a consequence, even if there existed a relationship between borrowers and lenders, this relationship was largely uninformative. With the beginning of transition, lenders had to learn to be concerned about the creditworthiness of borrowers. However, on the one hand the former did not have any experience in monitoring activity, and on the other hand the latter did not have a credit history or reputation to rely on.
The second reason is the economic instability that characterised the early stages of transition. In an unstable economic system, current performance is a poor indicator of future performance. Therefore, not only borrowers did not have a reputation deriving from the past, but they also had great difficulties in building one ex novo.
