Investment and Determinants of Financial Constraints When Sample Splitting Criteria Are Unknown and Endogenous

Bersant Hobdari, Derek C. Jones, Niels Mygind

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    Abstract

    Unlike previous empirical work in analyzing investment behavior and the determinants of liquidity constraints, we use a switching regression framework when sample separation is unknown and endogenous and firms are assumed to operate either in the financially constrained or in the financially unconstrained regime. The actual regime the firm is in is determined by a switching or selection function, which depends on those variables that theoretically determine the wedge between internal and external finance, the severity of information and agency problems and time-varying firm characteristics. By using new panel data for Estonian companies during 1993 through 1999 we find that: (i) separate regimes exist in investment behavior; (ii) the likelihood of being financially constrained is higher in firms that are recently privatized, small and where ownership is concentrated in the hands of insiders and the state; (iii) soft budget constraints lower the probability of a firm being financially constrained; (iv) the actual probabilities of operating in the financially constrained regime are calculated to be quite high and essentially stable during 1993-1999: 0.52-0.57 for state owned firms, 0.40-0.46 for domestic owned firms and 0.53-0.57 for employee owned firms; (v) ownership structure affects investment beyond its indirect effects through financial constraints. Corporate Investment, Liquidity Constraints, Insider Ownership, Switching Regression, Soft Budget Constraint.
    Original languageEnglish
    Place of PublicationFrederiksberg
    PublisherDepartment of International Economics and Management, Copenhagen Business School
    Number of pages48
    Publication statusPublished - 2007
    SeriesWorking Paper / Department of International Economics and Management, Copenhagen Business School
    Number2007-4

    Keywords

    • Corporate investment
    • Liquidity constraints
    • Insider ownership
    • Switching regression
    • Soft budget constraints

    Cite this

    Hobdari, B., Jones, D. C., & Mygind, N. (2007). Investment and Determinants of Financial Constraints When Sample Splitting Criteria Are Unknown and Endogenous. Frederiksberg: Department of International Economics and Management, Copenhagen Business School. Working Paper / Department of International Economics and Management, Copenhagen Business School, No. 2007-4