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Financial Conditions and Investment during the Transition: Evidence from Czech Firms

Author

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  • Lubomir Lizal

    (The William Davidson Institute at the University of Michigan Business School and CEPR)

  • Jan Svejnar

    (The William Davidson Institute at the University of Michigan Business School and CEPR)

Abstract

In this paper, we examine net investment during the early stages of transition using micro data on the population of medium and large industrial firms in the Czech Republic during the 1992-95 period. We examine the relevance of alternative models of investment and test if investment behavior varies across categories of ownership and with the legal status of firms. Our analysis of depreciation leads us to the conclusion that replacement investment displays a similar pattern in many ownership-legal form categories of firms. Retained profit is found to be a major determinant of new investment and the estimate is statistically significant even when we use the most robust fixed effects estimates based on one-year differences. We find that enterprise profitability has a strong positive effect on investment in all types of firms except for privately owned-limited liability companies and foreign owned and mixed ownership firms. These results are consistent with the financing-hierarchy and credit-rationing hypotheses which indicate that domestic firms cannot easily borrow investment funds externally and that net investment varies with retained profits. Firms take into account various stock measures of internal finance. In particular, a stock of cash, receivables, receivables overdue, payables, and payables overdue systematically affect net investment.

Suggested Citation

  • Lubomir Lizal & Jan Svejnar, 2001. "Financial Conditions and Investment during the Transition: Evidence from Czech Firms," Development and Comp Systems 0012008, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpdc:0012008
    Note: Type of Document - Acrobat PDF; pages: 41 ; figures: included
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    References listed on IDEAS

    as
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    Cited by:

    1. Martin Pospisil & Jiri Schwarz, 2014. "Bankruptcy, Investment, and Financial Constraints: Evidence from a Post-Transition Economy," Working Papers IES 2014/12, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2014.
    2. Earnhart, Dietrich & Lízal, Lubomír, 2002. "Effects of Ownership and Financial Status on Corporate Environmental Performance," CEPR Discussion Papers 3557, C.E.P.R. Discussion Papers.
    3. Lizal, Lubomir & Kocenda, Evzen, 2001. "State of corruption in transition: case of the Czech Republic," Emerging Markets Review, Elsevier, vol. 2(2), pages 138-160, June.
    4. Stepan Jurajda & Katherine Terrell, 2000. "Optimal Speed of Transition: Micro Evidence from the Czech Republic," William Davidson Institute Working Papers Series 355, William Davidson Institute at the University of Michigan.
    5. Stepan Jurajda & Katherine Terrell, 2001. "What Drives the Speed of Job Reallocation during Episodes of Massive Adjustment?," CERGE-EI Working Papers wp170, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    6. Štěpán Jurajda & Katherine Terrell, 2003. "Job growth in early transition: Comparing two paths," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 11(2), pages 291-320, June.
    7. Roman Horváth, 2005. "Financial Accelerator Effects in the Balance Sheets of Czech Firms," Working Papers IES 96, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
    8. repec:bla:etrans:v:11:y:2003-06:i:2:p:291-320 is not listed on IDEAS
    9. Earnhart, Dietrich & Lizal, Lubomir, 2006. "Effects of ownership and financial performance on corporate environmental performance," Journal of Comparative Economics, Elsevier, vol. 34(1), pages 111-129, March.
    10. Maxim Bouev, 2004. "Diverging Paths: Transition in the Presence of the Informal Sector," William Davidson Institute Working Papers Series 2004-689, William Davidson Institute at the University of Michigan.
    11. Dietrich Earnhart & Lubomir Lizal, 2007. "Does Better Environmental Performance Affect Revenues, Cost, or Both? Evidence From a Transition Economy," William Davidson Institute Working Papers Series wp856, William Davidson Institute at the University of Michigan.

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    More about this item

    Keywords

    Investment; Cash-flow; Restructuring; Ownership; Legal status; Transition to a market economy;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • P21 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Planning, Coordination, and Reform
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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