The Impact of Financial Structure on Firms' Financial Constraints: A Cross-Country Analysis

30 Pages Posted: 9 Jul 2009

See all articles by Christopher F. Baum

Christopher F. Baum

Boston College - Department of Economics

Dorothea Schaefer

German Institute for Economic Research (DIW Berlin); JIBS

Oleksandr Talavera

University of Birmingham

Date Written: February 2009

Abstract

We estimate firms' cash flow sensitivity of cash to empirically test how the financial system's structure and activity level influence their financial constraints. For this purpose we merge Almeida, Campello and Weisbach (2004), a pathbreaking new design for evaluating a firm's financial constraints, with Levine (2002), 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 80,000 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.

Keywords: financial constraints, financial system, cash flow sensitivity of cash

JEL Classification: G32, G30

Suggested Citation

Baum, Christopher (Kit) F. and Schaefer, Dorothea and Talavera, Oleksandr, The Impact of Financial Structure on Firms' Financial Constraints: A Cross-Country Analysis (February 2009). DIW Berlin Discussion Paper No. 863, Available at SSRN: https://ssrn.com/abstract=1431344 or http://dx.doi.org/10.2139/ssrn.1431344

Christopher (Kit) F. Baum (Contact Author)

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
617-552-3673 (Phone)
617-552-2308 (Fax)

Dorothea Schaefer

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany
+49 30 8978 9162 (Phone)
+49 30 8978 9104 (Fax)

JIBS ( email )

Jönköping, 55111
Sweden

Oleksandr Talavera

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom

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