Corporate Investments in Asian Emerging Markets: Financial Conditions, Financial Development, and Financial Constraints

Publication | May 2013

This paper explores the mechanisms through which finance affects corporate investments and capital accumulation. A key feature of this study is the separation of the effects of financial conditions from those of financial development.

Motivated by the literature on the finance-growth nexus, this paper explores the mechanisms through which finance affects corporate investments and capital accumulation. We separate the effects of financial conditions from those of financial development. Based on a sample of firms from five Asian emerging economies, we find that (1) financial conditions and financial development affect corporate investments through different channels. Financial conditions affect firms' growth opportunities and investment demand. Financial development primarily affects firms' external financing constraints. (2) Large firms benefit more from improved financial conditions, while small firms benefit more from financial development. (3) The effects of financial conditions and the level of financial development are asymmetric: they are stronger when the global financial crisis was unfolding and weaker during the subsequent rebound.

Contents 

  • Introduction
  • Data and Sample Statistics
  • Model Specifications and Hypothesis
  • Empirical Findings
    • Impact of Financial Conditions and Financial Development
    • Small versus Large Firms
    • Sub-Period Analysis
  • Conclusion
  • References