Financial market imperfections and corporate decisions

Financial Market Imperfections and Corporate Decisions Contributions to Economics www.springeronline.com/series/1262 Further volumes of this series can be found at our homepage Christian MuÈller Money Demand in Europe 2003 ISBN 3-7908-0064-3 Pablo Coto-MillaÂn General Equilibrium and Welfare 2002 ISBN 7908-1491-1 Cristina Nardi Spiller The Dynamics of the Price Structure and the Business Cycle 2003 ISBN 3-7908-0063-5 Wojciech W Charemza/Krystyna Strzala (Eds.) East European Transition and EU Enlargement 2002 ISBN 3-7908-1501-1 Natalja von Westernhagen Systemic Transformation, Trade and Economic Growth 2002 ISBN 3-7908-1521-7 Josef Falkinger A Theory of Employment in Firms 2002 ISBN 3-7908-1520-9 Engelbert Plassmann Econometric Modelling of European Money Demand 2003 ISBN 3-7908-1522-5 Reginald Loyen/Erik Buyst/Greta Devos (Eds.) Struggeling for Leadership: Antwerp-Rotterdam Port Competition between 1870±2000 2003 ISBN 3-7908-1524-1 Michael BraÈuninger Public Debt and Endogenous Growth 2003 ISBN 3-7908-0056-1 Brigitte Preissl/Laura Solimene The Dynamics of Clusters and Innovation 2003 ISBN 3-7908-0077-5 Markus Gangl Unemployment Dynamics in the United States and West Germany 2003 ISBN 3-7908-1533-0 Pablo Coto-MillaÂn (Ed.) Essays on Microeconomics and Industrial Organisation, 2nd Edition 2004 ISBN 3-7908-0104-6 Wendelin Schnedler The Value of Signals in Hidden Action Models 2004 ISBN 3-7908-0173-9 Pablo Coto-MillaÂn Utility and Production, 2nd Edition 2003 ISBN 3-7908-1423-7 Carsten SchroÈder Variable Income Equivalence Scales 2004 ISBN 3-7908-0183-6 Emilio Colombo/John Driffill (Eds.) The Role of Financial Markets in the Transition Process 2003 ISBN 3-7908-0004-X Wilhelm J Meester Locational Preferences of Entrepreneurs 2004 ISBN 3-7908-0178-X Guido S Merzoni Strategic Delegation in Firms and in the Trade Union 2003 ISBN 3-7908-1432-6 Russel Cooper/Gary Madden (Eds.) Frontiers of Broadband, Electronic and Mobile Commerce 2004 ISBN 3-7908-0087-2 Jan B Kune On Global Aging 2003 ISBN 3-7908-0030-9 Sardar M N Islam Empirical Finance 2004 ISBN 3-7908-1551-9 Sugata Marjit, Rajat Acharyya International Trade, Wage Inequality and the Developing Economy 2003 ISBN 3-7908-0031-7 Jan-Egbert Sturm/Timo WollmershaÈuser (Eds.) Ifo Survey Data in Business Cycle and Monetary Policy Analysis 2005 ISBN 3-7908-0174-7 Francesco C Billari/Alexia Prskawetz (Eds.) Agent-Based Computational Demography 2003 ISBN 3-7908-1550-0 Bernard Michael Gilroy/Thomas Gries/ Willem A Naude (Eds.) Multinational Enterprises, Foreign Direct Investment and Growth in Africa 2005 ISBN 3-7908-0276-X Georg Bol/Gholamreza Nakhaeizadeh/ Svetlozar T Rachev/Thomas Ridder/ Karl-Heinz Vollmer (Eds.) Credit Risk 2003 ISBN 3-7908-0054-6 GuÈnter S Heiduk/Kar-yiu Wong (Eds.) WTO and World Trade 2005 ISBN 3-7908-1579-9 Emilio Colombo ´ Luca Stanca Financial Market Imperfections and Corporate Decisions Lessons from the Transition Process in Hungary With 50 Figures and 63 Tables Physica-Verlag A Springer Company Series Editors Werner A Mçller Martina Bihn Authors Emilio Colombo, Assoc Professor Universita Milano Bicocca Dipartimento di Economia Politica Piazza Ateneo Nuovo 20126 Milano Italy emilio.colombo@unimib.it Luca Stanca, Associate Professor Universita Milano Bicocca Dipartimento di Economia Politica Piazza Ateneo Nuovo 20126 Milano Italy luca.stanca@unimib.it ISSN 1431-1933 ISBN-10 3-7908-1581-0 Physica-Verlag Heidelberg New York ISBN-13 978-3-7908-1581-8 Physica-Verlag Heidelberg New York Cataloging-in-Publication Data applied for Library of Congress Control Number: 2005930878 This work is subject to copyright All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Physica-Verlag Violations are liable for prosecution under the German Copyright Law Physica-Verlag is a part of Springer Science+Business Media springeronline.com ° Physica-Verlag Heidelberg 2006 Printed in Germany The use of general descriptive names, registered names, trademarks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use Cover-Design: Erich Kirchner, Heidelberg SPIN 11401773 43/3153-5 ± Printed on acid-free and non-aging paper To Elisa, Tommaso and Matteo To Giorgia, Maria, Chiara and Sabia Preface 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 colleagues 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 Financial market imperfections and corporate decisions: theory and evidence 2.1 Introduction 2.2 Financial market imperfections, investment and cycles 2.2.1 The Stiglitz view 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 3.1 3.2 3.3 transformation of the Hungarian financial system Introduction Macroeconomic background Liberalisation, privatisation and financial development 3.3.1 Banking and credit 3.3.2 Equity market 3.3.3 Foreign direct investment 3.4 Financial sector reform 3.4.1 The banking sector reform 3.4.2 The bankruptcy law and its economic effects 3.5 Looking ahead: Hungary and the Euro 3.6 Conclusions 35 35 36 44 45 48 49 50 50 51 54 56 X Contents Patterns of corporate financial positions 4.1 Introduction 4.2 Related literature 4.3 Methodology 4.4 Sectional distributions in the overall sample 4.5 Sectional distributions by sub-sample 4.6 Distribution dynamics The 5.1 5.2 5.3 5.4 5.5 Financial constraints and investment decisions 6.1 Introduction 6.2 Related literature 6.3 Data description 6.4 Methodology 6.5 Results 125 125 126 128 129 131 Conclusions 149 determinants of corporate capital structure Introduction The theory Data and descriptive statistics Methodology Results 67 67 69 71 72 74 76 105 105 105 108 112 114 Data appendix 7.1 Data description 153 153 References 165 Introduction This book investigates the role of financial markets for corporate decisions and macroeconomic performance in the transition process, focusing on the experience of Hungary, one of the early reformers among formerly centrally planned economies The book presents the results of an empirical analysis of company accounts for a large panel of Hungarian firms between 1989 and 1999, focusing on the role of financial market imperfections in determining corporate capital structure and investment decisions This introductory chapter provides a brief discussion of the motivation and structure of the book The emphasis on the role of financial market imperfections for firms' decisions is due to three main reasons First, in recent years this topic has received increasing attention in the theoretical and empirical economic literature Second, there are specific aspects that make financial market imperfections particularly relevant for Eastern European countries Third, the role of credit and financial markets during the transition process has been somewhat neglected by the literature on transitional economies, partly because initially other issues, such as labour market dynamics, appeared to be more relevant, and partly because of lack of adequate data In the past decades, financial market imperfections have been one of the central topics in microeconomics and macroeconomics, both theoretically and empirically Recent developments in the theory of asymmetric information have produced an alternative approach to the standard neoclassical framework in the analysis of financial markets Whereas in the standard neoclassical framework financial markets play a marginal role with respect to the real side of the economy, the new approach based on asymmetric information places financial markets at the core of macroeconomic dynamics A number of contributions showed that financial market imperfections are a crucial factor for both short term and long term macroeconomic dynamics In a long run perspective, growth is linked to the degree of development and efficiency of financial and credit markets (see, among others King and Levine (1993a), Beck et al (2000)) In a short term perspective, taking into account financial market imperfections allows to improve, both qualitatively and quantitatively 7.1 Data description CM (N T-H lO l> T}^ t^ T—1 00 OM lO 00 CO CO 1> i-H < l>QO Oi 00 (N lO lO I> ;0 (M 1-H LO 00 T H lO (M T-H T H t^ T-H l> ^ co ^ r-i T}^ CM o CM l> C5 o ^ o a> ;D Oi CO o ^ -^ ^ CO I> ^ CO lO 00 rH vH ^ CO CO ^ CM O 00 l ^ T-HCJirfO^lOO^lCiO-^CO i i O 0 ^ 0 0 Q O C O O ^ I > C O C p O C O ^ O O ' ^ t - C O O O 00 o C O I > O O J ^ C M I O O T - H Q O H T 0H0 T H T f l ( ^ J — l O ^ r H C O 0 C O r rH 0:> rH Tt< o r^ Oi WJ CO r H b - C P T j ^ 05 ' ^ 00 O CO — o> — o rH lO 00 t > CS CO (N rt< ^ - ;o ^ NW/ 1.^^ I> T}< O CO CO CO l o M:) gp t ^ 0 CM CM '^M' 'i^ V CO TH V.>« V r—1 rHkO^COO CM T-i > l^ S^V O'-H 00 CM ' ^ Cf5 (Ji ^O o rH l o lO »o CO o:> T^C0C5;O _ C^IOJOiO^-^OOrHTJ^rHOO C O O T H i O Q O ; p O U t ) O t ^ t > l > OOeOrHCMrHCOrHT^lOCMCPrH CO a CO r H r H O l O - ^ C M t ^ l > I > C O t - a ' ^ C O C O l O C M C ^ i l C t V l O l O L O C 0 I > ' r H C M r H t > ( ; O C T H C M C M C O C M O i l > C O I > O O I > C M t ^ ^CMCJ^rHCOCMOOCOCOCMlOrH CSIt>(M C O O t ^ O O C O C M O O i O ^ D i ^ ' ^ C O ^ C O ' ^ C S I C i r H ' ^ O O S O ' ^ C O C O i - H C O O ' ^ ( M I > T f T C M I > C O C O r H l O ( M -s 00COa5^CMCMlOrHl>.lO t - ^ O j i : ^ ^ C O C M C M r H C O C O C O C O c M O C M ^ ^ ^ ^ O i C M OlOrH?^^I>COOOOO^T-HrH ^ r H O i i ^ ; O C M C M i - H i O C M ^ ;0 l O TJH r H c o c M i - H L : K i : c M o o c o o c M i > C M r H l o S o o O O ^ O O C D t ^ i O C O CO O _ " T l O C O T H r H r H C ^ r H CM O CO '^'~>M:)^i!^oou:)icocooic < 00 CO rH CM r^ O CO CM 05 l> rH ^ ! > r H 00 CM T j H Q 0 C O C O C O r H C O CJ5!>-CMrHl>-05CMrH T-H t ^ C M I «;o CM i> S rH ^ 00 T-l 05 rH CO 00 lO Cf5 b- CO 00 t> C M O CO O CO r H CO M:> CO 05 00 00 00 CO CO 00 05 O CO 05 c^i CM rH IC CO CO rH O TH ^ C^ kO CO 00 rH CO 05 (N CO CO xf O 00 CM bCO CO rH [> CM 00 CO CO 00 CO rH rH CM rH 00 rH C© O 05 CO O TJ^ rH LO c:5 rH t* CO O rH CO T-H CO CO CM I> ^ O CO t^ CO l^ '"^ CO O CO CM 159 1991 1989 1990 12457 11540 15679 Cash Accounts Receivable 35242 39684 42482 54317 Inventories 57793 57548 10654 9635 Other Current Assets 7852 Totalcurrent Assets 112108 123264 118328 27512 FinancialInvestment 13307 19540 Net Fixed Assets 116679 119204 121087 15472 15948 16954 Other Assets Total Assets 257252 277905 283831 16533 18635 12484 Short Term Debt 31047 28253 29052 Accounts Payable 35081 28797 34876 Othercurrent Liab 84473 TotalCment Liab 69205 80068 11674 8004 11087 Long Term Debt 2881 2449 Other Long Term Liab 2607 Total Long Term Liab 10611 14556 13536 Shares 108568 115677 121577 56249 RetaindEarnings 50173 52091 3637 Reserves 1469 2382 -6616 Other Equity 5456 2948 Total Equity 165623 173084 174832 12943 12241 10888 Other Liabilities Note: Hungarian company account data, 1989-1999 1992 25701 47070 52411 32133 157065 54490 211262 13981 430255 31445 35261 54504 121211 14721 9627 24348 227146 23102 53088 -26798 274815 9879 1993 45494 149709 88704 102713 272264 82001 492784 25507 864621 56166 112852 160280 213887 27124 27181 54312 433667 48771 290911 -23414 574648 23765 1994 49391 155201 96387 87866 294965 80658 480874 31383 874141 59446 123334 166376 229895 32110 34756 66866 425779 22887 146705 -37705 551894 25051 1995 51260 102707 115620 79606 348371 76026 513410 23426 959453 70698 911'79 109767 271505 36487 50009 86497 433287 29101 154135 -37104 574503 28496 Table 7.5 Averages by variable/year: Balance Sheet 1996 57943 132177 138188 107777 426356 78781 582452 37664 1118425 93336 115504 136248 335610 52956 60062 113018 466792 47353 170640 -53956 632851 38282 1997 75096 164396 169414 136261 545169 100333 700836 39830 1386169 110359 136244 184335 420790 75487 69944 145431 534982 -3242 191376 45586 766599 53333 1998 85370 205064 206555 162331 659321 116648 827165 51441 1654577 118859 175083 216538 496340 96589 101357 197946 566588 43493 202569 68067 880719 79567 1999 99575 260082 243371 206952 809981 142503 968192 77186 1997862 133614 236502 276969 626859 117197 111625 228822 596770 128683 216016 94350 1035821 106256 a P R U -I 7.1 Data description Oi Ol o r-( CD O 00 05 CT> O CO o o 00 TH T—1 1—1 o o o o CO O 1—1 q d d d d d d d q d rH CM o 05 CO o o CO o o O O O O O O O O o r H ^ I> 05 05 T—1 1—1 00 O O C M O i O » O O C M ' < * » u0j r-, t-H rH CO O O I-H - ^ O 1-1 r^ o o o o o o o o o o CO 0 00 Oi O O O O O O O T - T—1 o o o CO O r-i o 1—( d>d>d)CD'd>d>d>d>TA CO O o o q CO in CO CS) k O C M C M O O O I > C M C O i - l ^ e l (D o Id o I—1 CM o q q q rH CO o d d d d d r-i d d d d o O O 05 05 T—I o o a> T-i +3 T—1 T—I o d q d d d d d d d d O 05 S c6o «3 «3 rH O «5 T—1 CO O 00 T—1 lO CO rH CO rH I—1 1—1 1—1 1—I 05 05 T—1 o d d d d bCO o rH CO o d d d d rH (M T—1 1>- o q q d d d d d d d rH 1—1 1—1 161 O O O rH O O CO o o rH O O O CO oO o O r O O H l > CO iO O O O — I 0 - ^ 0 C C O CC OC3 o O CO • CO O 1-1 CM o o q '^ o 1-1 O O I lO CM o CO c:> rH o o o rH d d d d d d d d q 1> CO o CM rH o CO q lO q d d d d d d d o d rH t ^ - ^ O ^ C O - ^ T t ^ O O C T i C O b - o C O C O O O i - H i - l C M O O O - ^ O r H ^ C O O O 1—1 C O C O O l l O f O C O C O O C O T j H H C O C O O O i - i r H C M q q q i q q c o ^ ^ q q q 1—1 1—1 I—( 1—1 1—1 d d d d d d d d d d i d d r - i 4J CO QJ O d (N CO Oi rH O co o d d d d d d d o d iq-H lO 05 CO CM o CO CO O o rH o o c^ o o o o o o o ^^ r-H ^ "Is 05 Oi o o 1—( 03 l> r'* H CM b- b- CO CO CM b-OOfOOOCOCMCOCOVO 0_ (Z) r-^ CcDCDdic6d)d>d)c6d)d>c5''^ c3 o -^ en 22 go o +3 ^H w o Q CO H3 o Q ^ aj o lll^ < a +^ —« fa fe O rt O O H 1—4 0) O OJ - C m^ O O