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Do External Funds Yield Lower Returns? Recent Evidence From East Asian Economies

Author

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  • Sarmistha Pal

    (Brunel University)

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.

Suggested Citation

  • Sarmistha Pal, 2005. "Do External Funds Yield Lower Returns? Recent Evidence From East Asian Economies," Development and Comp Systems 0512021, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpdc:0512021
    Note: Type of Document - pdf; pages: 36
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    Cited by:

    1. Nigel Driffield & Sarmistha Pal, 2010. "Evolution of capital structure in east Asia—corporate inertia or endeavours?," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 173(1), pages 1-29, January.
    2. Nigel Driffield & Vidya Mahambare & Sarmistha Pal, 2004. "Dynamic Adjustment of Corporate Leverage: Is there a lesson to learn from the Recent Asian Crisis?," Finance 0405007, University Library of Munich, Germany.

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    More about this item

    Keywords

    Asian Crisis; Efficiency of internal and external funds; Moral hazard of bad loans; Financial constraint; Random effects model with selection;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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