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An alternative method for measuring financial frictions

Uluc Aysun ()

No 2009-34, Working papers from University of Connecticut, Department of Economics

Abstract: Costly state verification models predict that the sensitivity of borrowing costs to financial leverage is positively related to the level of state verification costs (financial frictions). This paper constructs a measure of financial frictions that is consistent with this prediction of theory. Using bond deals from 47 countries, financial frictions are captured as the sensitivity of bond spreads to the issuing firms' financial leverage. This dynamic measure of financial frictions provides new insights into three characteristics of financial frictions. 1) In contrast to the inferences from widely-used measures, financial frictions display a large degree of variability, and have decreased over time. 2) The effect of financial frictions on private credit supply has decreased both in significance and magnitude over time. 3) Bankruptcy reforms, in general have not been effective in improving creditor/borrower rights.

Keywords: financial frictions; leverage sensitivity; financial accelerator; bond deals. (search for similar items in EconPapers)
JEL-codes: G15 K22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn
Date: 2009-10
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Journal Article: An Alternative Method for Measuring Financial Frictions (2011) Downloads
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