A Stochastic Frontier Analysis of Financing Constraints on Investment: The Case of Financial Liberalization in Taiwan

It is shown that investment under financing constraints can be modeled as a one-sided deviation from a frictionless investment level, and that effects of financing constraints can be identified and quantified by imposing a distributional assumption on the effects. Panel data on Taiwanese manufacturing firms between 1989 and 1996 are used in the estimation. It is found that (1) some of the sorting criteria used in the literature do not have significant and monotonic relationships with the degrees of financing constraint, resulting in problematic sample separations, and (2) the effects of financial liberalization in Taiwan are such that the investment efficiency improved over time for a typical firm, and the improvement was particularly large for smaller firms.

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