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He Impact of the Financial System S Structure on Firms Financial Constraints

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He Impact of the Financial System S Structure on Firms Financial Constraints
Journal of International Money and Finance 30 (2011) 678–691

Contents lists available at ScienceDirect

Journal of International Money and Finance journal homepage: www.elsevier.com/locate/jimf

The impact of the financial system’s structure on firms’ financial constraints
Christopher F. Baum a, b, *, Dorothea Schäfer b, c, Oleksandr Talavera d a Department of Economics, Boston College, Chestnut Hill, MA 02467, USA DIW Berlin, Mohrenstraße 58, 10117 Berlin, Germany Jönköping International Business School, Jönköping, Sweden d School of Economics, University of East Anglia, Norwich NR4 7TJ, UK b c

a b s t r a c t
JEL classification: G32 G30 Keywords: Financial constraints Financial structure Financial development Cash flow sensitivity of cash

We estimate firms’ cash flow sensitivity of cash to empirically test how the financial system’s structure and level of development influence their financial constraints. For this purpose we merge Almeida et al.’s work, a path-breaking design for evaluating a firm’s financial constraints, with that of Levine, 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 30,000 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. Ó 2011 Elsevier Ltd. All rights reserved.

1. Introduction For many years, financial theory has stressed the role of financial constraints on firms’ behavior, but it has rarely considered how obstacles to external financing may vary across different financial systems. Although stock markets can play a very important role in meeting firms’


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