Skip to main content
Log in

Institutional Determinants of Investment-Cash Flow Sensitivities in Transition Economies

  • Article
  • Published:
Comparative Economic Studies Aims and scope Submit manuscript

Abstract

We estimate investment-cash flow models for a large sample of firms in 13 transition economies over the period 1993–2003, and find that (1) investment-cash flow sensitivities decline over transition years; (2) for state-owned firms, in early transition the investment-cash flow sensitivity is negative, which we interpret as being consistent with soft budget constraints; (3) privatised firms invest efficiently; and (4) foreign-controlled firms are less financially constrained than other firms.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. See, for example, Lizal and Svejnar (2002) for the Czech Republic. This study explored data provided by the Czech Statistical Office over the period 1992–1998.

  2. See Budina et al. (2000) for Bulgarian firms over the period 1993–1995 using the Amadeus dataset.

  3. Most papers on corporate investment behaviour in transition countries focused on the early transition period. For example, see Lizal and Svejnar (2002) and Budina et al. (2000), Konings et al. (2002) for firms in Poland, the Czech Republic, Bulgaria and Romania during 1994–1999. Some studies examine late transition, for example, see Mueller and Peev (2007) for 151 publically listed firms in 10 transition economies during 1999–2003.

  4. For a survey of empirical studies, see Chirinko (1993), Mueller (2003, pp. 177–179), and Gugler (2005).

  5. For recent studies applying both AI and MD theories, see Gugler et al. (2004a).

  6. Various proxies of financial constraints are used, like dividend payments (Fazzari et al. 1988); firm affiliation to business groups (Hoshi et al., 1991); age, ownership concentration, and membership in an interrelated group (Chirinko and Schaller, 1995).

  7. A hardening of the budget constraint should only affect over-investing firms. Under-investing firms (firms with cash constraints) do have rates of return larger than their cost of capital, thus they already have a hard budget constraint.

  8. See, for example, Jones and Mygind (1999) for ownership change in Estonia; Grosfeld and Hashi (2003) for the Czech Republic and Poland; Mueller et al. (2003) for Bulgaria. For the differences in corporate performance depending on ownership concentration, see, for example, Hanousek et al. (2007).

  9. We may expect that corporatised state firms face harder budget constraint than state-owned enterprises. However, our data have limitations to separate the state firms into these two groups, thus we use a total sample of all state-owned firms.

  10. Among recent contributions see, for example, for Hungary, Colombo and Stanca (2006) for 4,333 firms over the period 1989–1999 and Perroti and Vesnaver (2004) for 56 public companies in the period from 1992 to 1998. Among the early studies, see, for example, Grosfeld and Nivet (1997) for 173 large firms in Poland during 1988–1994. The authors distinguished three types of enterprises: state-owned, ‘commercialised’, and privatised.

  11. See, for example, Perroti and Gelfer (2001). The authors examine the controlling role of banks in financial-industrial groups in Russia. They study 71 public companies in 1995 and find a negative correlation between investment and cash flow in bank-led groups. The authors explain this result with extensive reallocation of funds and use of profitable firms as cash cows.

  12. For discussion on the agency issues related to the corporate pyramid structures, see Morck et al. (2005).

  13. See Mueller (1986) for a similar approach.

  14. Amadeus is a Pan-European financial database, containing balance sheet, income statement, and ownership structure information on over 250,000 major public and private companies in all sectors in more than 30 European countries. The Amadeus ownership database provides basic information about the company owners, namely: identification number, name, type, nationality, and percentage of ownership stake (Ownership Database, Bureau van Dijk Electronic Publishing, 2004).

  15. For empirical evidence on the high ownership concentration of listed firms in Western Europe, see, for example, Gugler et al. (2004b).

  16. However, the Amadeus database like other official databases has limitations to measure the ultimate state control and capture only the direct state ownership in the non-financial firms. Some studies investigate the full degree of state control in privatised firms (see eg Hanousek and Kochenda, 2008).

  17. For a similar transition matrix describing ownership transformation, see Jones and Mygind (1999) for Estonia and Grosfeld and Hashi (2003) for the Czech Republic and Poland.

  18. Of course, it would be preferred to use a set of truly independent instrumental variables (IV) instead. It was, however, impossible for us to identify and collect a set of IVs that would vary across firms and time and that would be uniformly valid for all 13 countries in the sample.

  19. We observe similar results when we run yearly cross-sectional regressions. That is, cash flow coefficients reach values of more than 0.2 in 1995/1996 but only 0.05–0.1 in 2002/2003. These results are available upon request.

  20. Again we must note that we have only data on direct ownership at hand, so we can claim our results only for directly state-controlled firms.

  21. In a recent survey, Estrin et al. (2008) summarizes 34 empirical studies published or circulated as working papers by December 2007 and show that the positive privatisation effects on performance are conditional on factors like the type of the new private owners, corporate governance, access to know-how and markets, and the like.

  22. See the estimation procedure in the section named ‘Econometric Modeling’.

References

  • Arellano, M and Bond, SR . 1991: Some tests of specification of panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies 58: 277–297.

    Article  Google Scholar 

  • Arellano, M and Bover, O . 1995: Another look at the instrumental-variable estimation of error component models. Journal of Econometrics 68: 29–52.

    Article  Google Scholar 

  • Blundell, R and Bond, SR . 1998: Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87: 115–143.

    Article  Google Scholar 

  • Boycko, M, Shleifer, A and Vishny, RW . 1996: A theory of privatization. Economic Journal, Royal Economic Society 106 (435): 309–319.

    Google Scholar 

  • Budina, N, Garretsen, H and de Long, E . 2000: Liquidity constraints and investment in transition economies: The case of Bulgaria. Economics of Transition 8: 453–475.

    Article  Google Scholar 

  • Chirinko, R . 1993: Business fixed investment spending: Modeling strategies, empirical results, and policy implications. Journal of Economic Literature 31: 1875–1911.

    Google Scholar 

  • Chirinko, RS and Schaller, H . 1995: Why does liquidity matter in investment equations? Journal of Money, Credit, and Banking 27 (2): 527–548.

    Article  Google Scholar 

  • Colombo, E and Stanca, L . 2006: Investment decisions and the soft budget constraint. Evidence from a large panel of Hungarian firms. Economics of Transition 14 (1): 171–198.

    Article  Google Scholar 

  • Dewatripont, M and Maskin, E . 1995: Credit and efficiency in centralized and decentralized economies. Review of Economic Studies 62: 541–555.

    Article  Google Scholar 

  • Djankov, S and Murrell, P . 2002: Enterprise restructuring in transition: A quantitative survey. Journal of Economic Literature 40 (3): 739–792.

    Article  Google Scholar 

  • Estrin, S ., Hanousek, J ., Kǒcenda, E . and Svejnar, J . 2008: Effects of privatization and ownership in transition economies. The World Bank Policy Research Working Paper WP54811, January 2009.

  • Fazzari, SM, Hubbard, RG and Petersen, B . 1988: Financing constraints and corporate investment. Brookings Papers on Economic Activity 1: 141–195.

    Article  Google Scholar 

  • Grabowski, H and Mueller, DC . 1972: Managerial and stockholder welfare models of firm expenditures. Review of Economics and Statistics 54: 9–24.

    Article  Google Scholar 

  • Grosfeld, I and Hashi, I . 2003: Mass privatisation, corporate governance and endogenous ownership structure. Working Paper No. 596, July, William Davidson Institute.

  • Grosfeld, I and Nivet, JF . 1997: Wage and investment behaviour in transition: Evidence from a polish panel data set. CEPR Discussion paper No. 1726.

  • Gugler, K . 2005: Der Einfluss von Corporate Governance auf die Determinanten und Effekte von Investitionen. Journal für Betriebswirtschaft 55: 113–143.

    Article  Google Scholar 

  • Gugler, K, Mueller, D and Yurtoglu, BB . 2004a: Marginal q, Tobin's q, cash flow, and investment. Southern Economic Journal 70 (3): 512–531.

    Article  Google Scholar 

  • Gugler, K, Mueller, DC and Yurtoglu, BB . 2004b: Corporate governance, capital market discipline and the returns on investment. Journal of Law and Economics XLVII: 589–633.

    Article  Google Scholar 

  • Hanousek, J and Kochenda, E . 2008: Potential of the state to control privatized firms. Economic Change and Restructuring 41 (2): 167–186.

    Article  Google Scholar 

  • Hanousek, J, Kochenda, E and Svejnar, J . 2007: Origin and concentration: Corporate ownership, control and performance in firms after privatization. Economics of Transition 15 (1): 1–31.

    Article  Google Scholar 

  • Hoshi, T, Kashyap, A and Scharfstein, D . 1991: Corporate structure, liquidity, and investment: Evidence from Japanese industrial groups. Quarterly Journal of Economics 106: 33–60.

    Article  Google Scholar 

  • Johnson, S, La Porta, R, De Silanes, F and Shleifer, A . 2000: Tunnelling. American Economic Review 90 (2): 22–27.

    Article  Google Scholar 

  • Jones, D and Mygind, N . 1999: The nature and determinants of ownership changes after privatisation: Evidence from Estonia. Journal of Comparative Economics 27: 422–441.

    Article  Google Scholar 

  • Kaplan, SN and Zingales, L . 1997: Do investment-cash flow sensitivities provide useful measures of financing constraints? Quarterly Journal of Economics CXII: 169–215.

    Article  Google Scholar 

  • Kaplan, SN and Zingales, L . 2000: Investment-cash flow sensitivities are not valid measures of financing constraints. Quarterly Journal of Economics 115 (2): 707–712.

    Article  Google Scholar 

  • Konings, J, Rizov, M and Vandenbusshe, H . 2002: Investment and credit constrains in transition economies: Micro evidence from Poland, the Czech republic, Bulgaria and Romania. LICOS Discussion Paper 112.

  • Kornai, J . 2000: What the change of system from socialism to capitalism does and does not mean. Journal of Economic Perspectives 14 (1): 27–42.

    Article  Google Scholar 

  • Kornai, J . 2001: Hardening the budget constraint: The experience of the post-socialist countries. European Economic Review 45: 1573–1599.

    Article  Google Scholar 

  • Kornai, J, Maskin, E and Roland, G . 2003: Understanding the soft budget constraint. Journal of Economic Literature 41 (4): 1095–1136.

    Article  Google Scholar 

  • Lizal, L and Svejnar, J . 2002: Investment, credit rationing and the soft budget constraint: Evidence from Czech panel data. Review of Economics and Statistics 84 (2): 353–370.

    Article  Google Scholar 

  • Morck, R, Stangeland, D and Yeung, B . 2000: Inherited wealth, corporate control, and economic growth, in concentrated corporate ownership In: Morck, R (ed). University of Chicago Press: Chicago, IL.

    Book  Google Scholar 

  • Morck, R, Wolfenzon, D and Yeung, B . 2005: Corporate governance, economic entrenchment and growth. Journal of Economic Literature 43: 657–722.

    Article  Google Scholar 

  • Mueller, DC . 1986: Profits in the long run. Cambridge University Press: Cambridge.

    Book  Google Scholar 

  • Mueller, DC . 2003: The corporation: Growth, diversification and mergers. Routledge: London.

    Book  Google Scholar 

  • Mueller, DC, Dietl, H and Peev, E . 2003: Ownership, control and performance in large Bulgarian firms. Journal for Institutional Innovation, Development and Transition 7: 71–88.

    Google Scholar 

  • Mueller, D and Peev, E . 2007: Corporate governance and investment in central and Eastern Europe. Journal of Comparative Economics 35: 414–437.

    Article  Google Scholar 

  • Myers, SC and Majluf, NS . 1984: Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics 12: 187–221.

    Article  Google Scholar 

  • Peev, E . 1995: Separation of ownership and control in transition: The case of Bulgaria. Europe-Asia Studies 47 (5): 859–875.

    Article  Google Scholar 

  • Perroti, EC and Gelfer, S . 2001: Red barons or robber barons? Governance and investment in Russian financial-industrial groups. European Economic Review 45: 1601–1617.

    Article  Google Scholar 

  • Perroti, EC and Vesnaver, L . 2004: Enterprise finance and investment in listed Hungarian firms. Journal of Comparative Economics 32: 73–87.

    Article  Google Scholar 

Download references

Acknowledgements

This research was partly supported by the FWF project P 19522-G14 on ‘Corporate Governance in Central and Eastern Europe’, by a Marie Curie Intra-European Fellowships within the 6th European Community Framework Programme and by the Austrian National Bank. We thank the seminar participants for helpful comments at the corporate governance and investment workshop in Jönköping, at the NOEG annual conference, at the seminar of the Department of Economics at the University of Vienna, and at the FMA conference 2008 in Prague.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Evgeni Peev.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Gugler, K., Peev, E. Institutional Determinants of Investment-Cash Flow Sensitivities in Transition Economies. Comp Econ Stud 52, 62–81 (2010). https://doi.org/10.1057/ces.2009.11

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/ces.2009.11

Keywords

JEL Classifications

Navigation