The Impact of Financial Structure on Firms' Financial Constraints: A Cross-Country Analysis

Christopher Baum (), Dorothea Schäfer and Oleksandr Talavera

No 690, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We estimate firms' cash flow sensitivity of cash to empirically test how the financial system's structure and activity level influence their financial constraints. For this purpose we merge Almeida et al. (2004), a path-breaking new design for evaluating a firm's financial constraints, with Levine (2002), 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, influences the cash flow sensitivity of cash of constrained firms but leaves unconstrained firms unaffected. We test our hypothesis with a large international sample of 80,000 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 the constrained firms with easier access to external financing.

Keywords: financial constraints; financial system; cash flow sensitivity of cash (search for similar items in EconPapers)
JEL-codes: G32 G30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-cfn
Date: 2008-10-08, Revised 2009-09-22
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Working Paper: The Impact of Financial Structure on Firms' Financial Constraints: A Cross-Country Analysis (2009)
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