Soft Budget Constraints in EU Transition Economy Enterprises

Tomoe Moore

International Finance, 2009, vol. 12, issue 3, 411-430

Abstract: Soft budget constraints (SBCs) can be said to exist in situations where governments rescue loss‐making firms in order to guarantee their survival by means of either a direct or an indirect injection of credit. The credit markets of the former socialist economies of Central and Eastern Europe were characterized, in general, by the syndrome of SBCs, whereby resources were often invested inefficiently. This paper empirically analyses the effect of joining the EU, where conditions for membership included the removal of SBCs, on restructuring the traditional financing methods for capital formation in EU transition economy enterprises. In the pre‐entry period, enterprises in the transition economies are found to be sensitive to credit in financing capital formation, exhibiting the prevalence of SBCs. However, the cost of capital becomes more important in the post‐entry period, which may be seen as a consequence of the reduced prevalence of SBCs, while market‐driven interest rates become more important in determining investment.

Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://doi.org/10.1111/j.1468-2362.2009.01246.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:intfin:v:12:y:2009:i:3:p:411-430

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=1367-0271

Access Statistics for this article

International Finance is currently edited by Benn Steil

More articles in International Finance from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().