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DO EXTERNAL FUNDS YIELD LOWER RETURNS? RECENT EVIDENCE FROM EAST ASIAN ECONOMIES

Sarmistha Pal ()

Development and Comp Systems from EconWPA

Abstract: One of the central explanations of the recent Asian Crisis has been the problem of moral hazard as the source of over-investment and excessive external borrowing. There is however rather limited firm-level empirical evidence to characterise inefficient use of internal and external finances. Using a large firm-level panel data-set from four badly affected Asian countries, this paper compares the rates of return to various internal and external funds among firms with low and high debt financing (relative to equity) among financially constrained and other firms. Selectivity corrected estimates obtained from random effects panel data model do suggest evidence of significantly lower rates of return to long-term debt, even among firms relying more on debt relative to equity in our sample. There is also evidence that average effective interest rates often significantly exceeded the average returns to long- term debt in the sample countries in the pre-crisis period.

Keywords: Asian Crisis; Efficiency of internal and external funds; Moral hazard of bad loans; Financial constraint; Random effects model with selection (search for similar items in EconPapers)
JEL-codes: G32 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-sea
Date: 2005-12-21
Note: Type of Document - pdf; pages: 36
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Journal Article: Do external funds yield lower returns?: Recent evidence from East Asian economies (2006) Downloads
Working Paper: DO EXTERNAL FUNDS YIELD LOWER RETURNS ? RECENT EVIDENCE FROM EAST ASIAN ECONOMIES (2004) Downloads
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpdc:0512021

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