FINANCIAL STRUCTURE, FIRMS’ INVESTMENTS AND THE CHANNELS OF MONETARY POLICY IN INDONESIA
Abstract
Using Tobin’s q and Euler equations estimated by a novel technique of Blundell and Bond’s system MM, this paper investigate the role of financial factors (cash flow and leverage) in investment spending of Indonesian listed companies during 1993- 1997. Overall, the results suggest the existence of financial constraints and agency costs for Indonesian firms in raising external funds. However, agency costs vary across firms according to whether the firms are members of large business groups owning foreign exchange banks and their financial conditions (leverage and pay out ratio). These results provide indirect support to the existence of the credit channel of monetary policy which recently becomes a hot debate in the aftermath of the recent Asian financial crisis. A microeconomic aspects of both banks and firms. Specifically, the degree of financial frictions should be monitor using various indicators such as firms’ financial leverage, firms’ access to bank loans and bank’s willingness to lend.
JEL Classification : E44, G31
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References
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Pomerleano, M. (1998). The East Asia crisis and corporate finances ; the untold story. World Bank Policy Research Working Paper, No. 1990.
Schiantarelli, F. (1997). Financial constraints and investment : methodological issues and international evidence. Oxford Review of Economic Policy, 12 (2), pp. 70-89.
Schiantarelli, F. and Sembenelli, A. (1995). Form of ownership and financial constraints : Panel data evidence from leverage and investment equations. Working Paper Department of Economics, Boston College, No. 286.
Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, Feb., 1 (1). pp. 15-29.
Ang, J. S., Fatemi, A. and Tourani-Rad, R. (1997). Capital structure and dividend policies of Indonesian firms, Pacific-Basin Finance Journal, 5, pp. 87-103.
Arrelano, M. and Bond, S. (1991). Some tests of specification for panel data : Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58, pp. 277-297.
Arrelano, M. and Bond, S. (1998). Dynamic Panel Data Estimation Using DPD98 For Gauss. Mimeo.
Bernanke, B. and Gertler, M. (1989). Agency costs, collateral, and business cycle fluctuations, American Economic Review, 79, pp.14-31.
Bernanke, B. and Gertler, M. and Gilchrist, S. (1998). The financial accelerator in a quantitative business cycle framework. NBER Working Paper, No. 6455.
Blundell, R. Bond, S., (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87, pp.115-143.
Blundell, R., Bond, S., Devereux, M., and Schiantarelli, F. (1992). Investment and Tobin’s q : evidence from company panel data. Journal of Econometrics, 51, pp. 233-57.
Bond, S. and Meghir, C. (1994). Dynamic investment models and the firm’s financial policy. Review of Economic Studies, Apr., 61 (32), pp. 197-222.
Chirinko, R.S. (1996). Finance constraints, liquidity and investment spending : theoretical restrictions an international evidence, Federal Reserve Bank of Kansas City Research Working Paper, No. 96-04.
Claessen, S., Djankov, S., and Lang, L. (1998). East Asian Corporates : growth, financing and risks over the last decade, World Bank – Policy Research Paper Series, 2017.
Deveruex, M. and Schiantarelli (1990). Investment, financial factors and cash flow : evidence from UK panel data, in R. Glenn Hubbard (ed), Asymmetric information corporate finance, and investment. University of Chicago Press, oo. 279-306.
Ding, W., Domac, I, and Ferri, G. (1998). Is there a credit crunch in East Asia? World Bank – Policy Research Working Paper Series, No. 1959.
Domac, I, and Ferri, G. (1998). The real impact of financial shocks : evidence from the Republic of Korea. World Bank – Policy Research Working Paper Series, No. 2010.
Elston, J.A. (1997). Investment, liquidity constraints and bank relationships : evidence from German manufacturing firms. American Institute for Contemporary German studies, Economic Studies Working Paper Series, The John Hopkins University, No. 17.
Fazzari, S., Hubbard, G.R., and Petersen, B. (1996). Financing constraints and corporate investment. Brooking Papers of Economic Activity, 1, pp. 141-195.
Fazzari, S., Hubbard, G.R., and Petersen, B. (1988). Financing constrains and corporate investment. Response to Kaplan and Zingales. NBER Working Paper, No. 5462.
Feldstein, M. (1998). Refocusing the IMF. Foreign Affairs, Mar/Apr., pp. 20-33.
Gertler, M. And Hubbard, G.R. (1988). Financial factors in business fluctuations, in Financial Market Volatility, Federal Reserve Bank of Kansas City.
Gilchrist, S. and Himmelberg, C.P. (1995). Evidence on the role of cash flow for investment. Journal of Monetary Economics 36. Pp. 541-572.
Hall, B., Mairesse J., Mulkay, B. (1998). Firm-level investment in France and the United States : an exploration of what we have learned in twenty years. Nuffiled College Oxford – Economic Discussion Paper, No. 143.
Hayashi, F. (1982). Tobin’s marginal q and average q : a neoclassical interpretation. Econometrica, 59, pp. 731-53.
Hoshi, T., Kashyap, A.K., and Shcarfstein, D. (1991). Corporate structure, liquidity and investment : evidence from Japanese panel data, Quarterly Journal of Economics, 106 (11), pp. 33-60.
Hubbard, G. (1998). Capital – market imperfections and investment. Journal of Economics Literature, 36, pp. 193-225.
Indonesian Business Data Centre (1996). Anatomy of Indonesian Conglomerates. IBDC, Jakarta.
International Monetary Fund (1999). IMF Supported programs in Indonesia, Korea and Thailand : a preliminary assessment. IMF : Washington.
Jensen, M. and Meckling, W. (1976). Theory of Firm : managerial behavior, agency costs and ownership structure. Journal of Financial Economics, Oct, 3 (4), pp. 305-60.
Kaplan, S. and Zingales, L. (1997). Do investment cash flow sensitivities provide useful measures of financing constraints? Quarterly Journal of Economics, Feb, 112 (1), pp. 169- 215.
Krugman, P. (1999). Balance sheets, the transfer problem, and financial crises. Mimeo. Jan.
Lang, L. Ofek, E., and Stulz, R.M. (1996). Leverage, investment, and firm growth. NBER Working Paper No. 5165.
Modigliani, F. and Miller, M.H. (1958). The cost of capital, corporate finance and the theory of investment. American Economic Review, 48, pp. 261-97.
Myers, S.C. (1977). Determinants of corporate borrowing, Journal of Finance, 5, pp. 147-75.
Oliner, S.D. and Rudebusch. G.D. (1996). Is there a broad credit channel for monetary policy? Federal Reserve Bank of San Francisco Economic Review, 1, pp. 3-13.
Pomerleano, M. (1998). The East Asia crisis and corporate finances ; the untold story. World Bank Policy Research Working Paper, No. 1990.
Schiantarelli, F. (1997). Financial constraints and investment : methodological issues and international evidence. Oxford Review of Economic Policy, 12 (2), pp. 70-89.
Schiantarelli, F. and Sembenelli, A. (1995). Form of ownership and financial constraints : Panel data evidence from leverage and investment equations. Working Paper Department of Economics, Boston College, No. 286.
Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, Feb., 1 (1). pp. 15-29.
Published
2003-10-11
How to Cite
Agung, J. (2003). FINANCIAL STRUCTURE, FIRMS’ INVESTMENTS AND THE CHANNELS OF MONETARY POLICY IN INDONESIA. Buletin Ekonomi Moneter Dan Perbankan, 3(1), 146-178. https://doi.org/10.21098/bemp.v3i1.291
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Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
