credit constraints in latin america

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CreditConstraintsandInvestmentinLatinAmericaArturo GalindoFabio Schiantarelli

Editors

inter-American Development BankWashington, D.C.2003


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2003 Inter-American Development Bank1300N ewYorkAvenue, N.W.Washington, D.C. 20577Producedby the IDBPublic InformationandPublications Section.To order this book, contact:IDBBookstoreTel: 1-877-PUBSIDB/(202) 623-1753Fax: (202) 623-1709E-mail: [email protected]/pubTheviewsandopinions expressedinthis publicationarethoseof theauthorsand do not necessarily reflect the official position of the Inter-AmericanDevelopment Bank.Cataloging-in-Publication data providedby theInter-AmericanDevelopmentBankFelipe Herrera LibraryCredit constraintsand investment inLatin America/Arturo GalindoandFabio Schiantarelli, editors.

p. cm. Includes bibliographical references.1.Commercial creditLati n America. 2. Financial institutionsLati nAmerica. 3. InvestmentsLati n America. 4. CorporationsLati nAmerica. I. Galindo, Arturo J. II. Schiantarelli, Fabio. III. Inter-American Development Bank.

ISBN 1931003599 LCCN: 2003110757

332.3 C597--dc21
http://www.iadb.org/pubhttp://www.iadb.org/pub


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PrefaceThis book contains new evidence on the nature, extent, evolution, andconsequencesof financingconstraints inL atin America.Who has and whodoes not have accessto credit markets and the impact of such accessonfirmperformanceare questions of paramo unt importance. M oreover, it iscrucial to understand the dynamics of credit markets after significantevents, suchassudden stopsininternationalcapitalflows, or theadoptionofpoliciesto liberalizefinancialmarkets.Researchers insideandoutside L atin Am erica have devoted m uchat-tentionto themacroeconomiceffectsof financialcrisesand financialpoli-cies,yettherehasbeen little researchon the microeconomic implicationsofsuch events. This book constitutes aserious, thoughtfu l,and importantattempt to fillthis gap .Written by a distinguished group ofeconom ists, the chapters pro-vide empirical analysisof the factors that determine the accessto creditand itscom position, theroleo fcredit inform ation ineasingfinancialcon-straints, the impact of organizational structures on financial constraintsand investment, and the dynamic effects of crises and financial policies onaccess to credit and capital accumulation. The authors offer importantnew insightsandbringnewevidencetobearon keyissuesin thepolicyde-bate on the future of Latin American development.

Guillermo Calvo, Chief EconomistInter-American Development Bank


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LatinAmericanResearchNetworkInter-American DevelopmentBankThe Inter-American Development Bank created the Latin AmericanResearchNetworkin 1991inorder to strengthen policy formu lation andcontributeto thedevelopment policy agendainLatin America. Throughacompetitive bidding process, the network provides grantfunding to lead-ingLatin American research centers to conduct studiesoneconomic andsocial issues selectedby the Bankin consultation with the region's devel-opment community. Mostof the studies are comparative, which allowsthe Bankto build itsknowledge baseand drawon lessons from experi-encesinm acroeconomicand financialpolicy, modernization of the state,regulation, poverty and inc om e distribu tion, social services, and employ-ment. Individual country studies areavailableasworking papersand arealsoavailablein PD Fformaton theInternetathttp://www.iadb.org/res.

AcknowledgmentsThe studies in this book were financed by the Latin American ResearchNetworkof the Inter-American Development Bankand would not havebeenpossible without the collaboration ofmany friends and colleagues.The author s would like to thank the following for their c omments and col-laborationon theindividualstudies: ThorstenBeck, RicardoCaballero, C.Calomiris, G. Caprio Jr., Mauricio Cardenas, S. Claessens, Jose Fanelli,Gaston Gelos, Carlos Ibarra, Maria Eugenia Ibarrarn, Tullio Jappelli,LeoraKlapper, AsliDemirgKunt Ross L evine N o r m a n Loayza InessaLove V. Maksimovic Alejandro Micco Daniel Oks S.Ospina CarlosA.Rodriguez Mariano Rojas Susana Sanchez Sergio Schmukler Edua rdoSiandra Kim Staking and FernandoTenjo. T heauthorsarealso indebtedto NorelisBetancourt and Raquel Gom ezfor valuable adm inistrativesupportand to John Dunn Sm ith for pro vid in geditorialexpertise.
http://www.iadb.org/reshttp://www.iadb.org/res


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ContentsCHAPTER1DeterminantsandConsequencesof FinancialConstraintsFacing Firms inLatin America: An Overview 1Arturo Galindo and Fabio Schiantarelli

CHAPTER2TheEffect ofBankRelationshipsonCreditF O R f IR M S IN a R G E N T I N AJorge M . Streb, Javier Bolzico, Pablo Druck,Alejandro Henke, J o s Rutman,and Walter Sosa EscuderoCHAPTER 3DeterminantsandConsequencesof FinancialConstraintsFacing Firms inArgentina 71J o s M . Fanelli, RicardoN . Bebczuk, andJuanJ .Prade lliCHAPTER4Credit, Financial Liberalization, and ManufacturingInvestmentinColombia 117Maria Angelica Arbelez andJuan J o s EchavarriaCHAPTER 5TheEffectsofCredit ConstraintsonCostaRicanManufacturing Firms 151Alexander Monge-Naranjo and LuisJ .HallCHAPTER6Access toL ong-Term Debtand Effectson Firm Performance: Lessons from Ecuador 199FidelJaramillo and Fabio Schiantarelli

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vi CONTENTS

CHAPTER7InternalCapital Marketsand theFinancing ChoicesofMexican Firms,1995-2000 225Gonzalo CastaedaCHAPTER8InvestmentandFinancial Restrictionsat theFirmLevelinUruguay 259Julio deBrun, Nestor Gandelman,andEduardoBarbieriBIBLIOGRAPHY 29 3


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CHAPTER 1

Determinants andConsequencesofFinancialConstraintsFacing

FirmsinLatinAmerica:AnOverview

Arturo Galindo and Fabio SchiantarelliBank credit plays a very important role for firms, especially in developingcountries where equity markets are considerably underdeveloped. If access tobank loansi srestricted, potentially profitable projec ts cannotbe undertaken.Since technology isoften embedded in new capital goods, the capacity ofeconomies to absorb newmethods ofproduction and togrowis,therefore,adverselyaffected. Hence,theabilityof thebanking sectortopool resourcesand channel them efficiently to firms is an important determinant of theprocessofeconomic development and growth.

Thechaptersinthisvolume studythedeterminants and consequencesof credit supply restrictions at the firm level in Latin America using microdata.1Thebook covers Argentina, Colombia, CostaRica,Ec uador, Mexico,and Uruguay.Thechapters provide quantitative evidence on firms' financ-ing choices (accesstobank loans, maturity structure,and currency denomi-nation)and on how firmcharacteristicsandpast historyaffectthese choices.2They also analyze the effect of financing constraints on firms' investmentArturo Gal indo is a research economist at the Inter-American Development Bank; FabioSchiantarellii s aprofessor ofeconomics atBoston College.1All but one of the chapterswerepartof the project DeterminantsandConsequencesofFinancial Constraints Facing Firms in Latin America and the Caribbean, financed by theIDB. The exception is Jaramillo and Schiantarell i (chapter 6), which had been prepared fortheWorld B ank con ference Term Finance: Theoryan d Evidence, an d appeared asWorldBankPolicy Research Working Paper 1725.2The role of information asymmetries in accessing credit (or not) has been amply discussedin the literature. See, for instance, the seminal c ontribution by Stiglitz and W eiss (1981).


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2 GALINDOANDSCHIANTARELLI

choicesandshow thattheseverityofconstraints dependson firmcharacter-istics suchassize, membership in abusiness group,and foreign ownership.3The investigation of all these issues requires the availability of firm-levelmicro data.The use ofsuch data is acommon feature of all the chaptersinthis volumeand one of itsstrengths.4The results suggest that accesstocredit dependsnotonlyonfavorablebalance sheet characteristics,but alsoon the closenessof the relationshipbetweenfirms andbanksandcredit history. Accesstolong-term loansandtoloansdenominatedinforeign currencyispositively relatedto thesizeandtangibilityof firms'assetsandnegatively relatedtomeasuresofcountry risk.Moreover,firmsthathave foreignparticipationappearto belessfinanciallyconstrainedintheir investment decisions.Thesameistruefor firmsthatareassociatedwith business groups.Another issue that isinvestigatedinsomeof thechaptersis theevolu-tionover timeof financingconstraints.Inparticular,theauthors presentev-idenceon the effect of financialreformonaccesstoexternalfinance, and onhow thisaffects firms'real choices.Theconsequencesof financial andbank-ingcriseson financingconstraintsarealso addressed.One of the interestingissuesstudied iswhether crisis episodes and financial reformhavea differ-entialeffect ondifferent typesof firms. On thewhole,i tappears that finan-cial liberalization tends to relax financial constraints for firms that werepreviouslyconstrained, whilefinancial crises tighten them. However,firmsthat have more accesstoexternal sourcesof finance, forinstance,viaexportsorownership links, appearto suffer lessinpost-crisis periods.

This introductory chapter reviewsthemain issues concerning firms'financingchoicesandinvestment decisionsin thepresenceofcapital marketimperfections. The focus then turns to the methodology anddata sourcesused in the chapters.After presentingthemain results,thechapter concludeswith adiscussionof the policy implications that can be drawn from thisproject.3S eeSchiantarelli (1996)and Hubbard (1998)for acritical review.4Thechaptersin this book complement previous researchon the impactof the institutionalframework surrounding credit systems on the supply of credit. See the contributions ofLa Porta, Lpez-de-Silanesand Shleifer (1998);Levine(1998); Japelli and Pagano (2001);Padilla an d Requejo (2001); and Claessens and Laeven (2002). For country-specificevidence,see thechaptersinPagano (2001).


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FINANCIALCONSTRAINTSINLATIN AMERICA 3

TheMainIssuesThe main issues in the discussion of financial constraints facing firms inLatin Americaareaccesstocreditand financingconstraintsand investment.Access toCreditStiglitzandWeiss(1981)formalizethe effect ofasymmetric informationi nthe loan marketand offer arationalefor the existenceoflimited accesstocredit.Inessence, they assumethatbankscanonlyclassifythe creditwor-thinessof firm s at abroad level; thatis,they haveaglobal perceptionof thedistribution ofreturns acrossacertain varietyofprojects,butlack knowl-edge about the creditworthiness of specific firms thatwishto undertakeparticular projects.In this setting,the interest rate chargedon loans notonly influencesthe amount ofloans granted,but alsothe riskinessof thecreditor s ownportfolioofloans, eitherbysorting potential borrowersac -cordingtotheirrisk (the adverseselectionproblem)or byaffectingthe be-haviorofborrowers (the moral hazard problem).Thecombined resultis acredit supply curvethatmight not bemonotonicallyincreasing in the in-terest rate. Banks profit maximization might then leadto an equilibriumwherethemarketis notclearedanddemandforcreditexceeds supply.5Although StiglitzandWeiss s conclusionon thepossibilityofcreditra-tioningisderivedin amodel that assumes debt isexogenous in the formofacontract, italso holds incostly state verification models where debt arisesendogenouslyas the optimal contract (Williamson 1986, 1987). Moreover,the possibilityofcredit rationingisrobust and survivesthe introduction ofmechanisms thataredesignedtoaddresstheadverse selectionormoral haz-ard problem, suchas the use ofcollateral(Bester1985). Althoughit hasbeenshownthat such mechanisms mitigatetheproblems derivedbyinformationasymmetries,theyare notcompletely eliminated, especiallyifpotential bor-rowersexhibit decreasing average risk aversion (StiglitzandWeiss 1986).Insuchacase, wealthier agentsare theonly onesw howouldbegranted credit,butthey would alsobe theworst risks. Moreover, evenif allagents have sim-ilar risk aversion,ifasset marketsare notdeveloped, banks willstillface the5Surveysanddiscussionof theliteratureoncredit rationingcan befound inBlanchardandFischer(1989),FreixasandRochet(1998), andMazzoli(1998).


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FINANCIALCONSTRAINTS INLATIN AMERICA 5

Theemphasisonlong-termfinanceand thepotentially adverse conse-quences whenit is inshort supplyissomewhatatodds with recent theoreti-calcontributions that emphasizethefactthatthe use ofshort-term debtm aybeassociated with higher-quality firms and may have better incentive pro p-erties (Diamond 199la).In particular, the possibility of premature liquida-tion may act as adisciplinary device that improves firms' performance.Arethinkingof theroleoflong-term debt, particularly when heavily subsidized,hasalso been prompted by the problems development banks have encoun-tered inm any countries in terms ofnonperfo rmin g loans, and by doubtsabouttheselection criteria usedin allocatingfunds. In anycase,theissueofthedeterminants of thematuritystructureofdebtand itsconsequencesforinvestmentand productivity are im portant topics that deserve investigation.Financing C onstraintsan d Investmen tIngeneral, evenifinformation asymmetriesandcontract enforcemen t prob-lemsdo notleadtooutright creditrationing,they m ake external funds im-perfectsubstitutesfo rinternalfunds and invalidatetheseparation betweenfinancing and investment choices implied by theModigliani-Millertheorem(ModiglianiandMiller 1958). Many papers have exploredtheconsequencesofthese info rmatio nand incentive problemsfo rinvestment.7Althoughthemodelsdiffer in their details,twomain results emergefrom this literature.First,unlesstheloansarefullycollateralized, externalfinance ismore costlythan internalfinance.Second, everythingelseequal,thepremiumonexter-nal finance is an inverse function of aborrower's net worth (liquid assetsplusthecollateral valueofilliquid assets).Itfollowsthatanynegative shockto net worth (due to technological reasons,shifts in investors' preferences,or changesin mo netary policy) leads to an increase in the premium and,therefore,to a reduction in investment and produc tion. For this reason, theinitialimpact of theshockmay beamplified (the so-calledfinancialacceler-ator effect).Theproblems associated with asymmetric information and contractenforcement affect firms differently, and severalcriteriahave been used in7 See, for instance, Bernanke and Gertler (1989, 1990); Gertler and Hubbard (1988);Calomiris and Hubbard (1990);Gertler (1992); Bernanke, Gertler, and Gilchrist (1996,1999);Kiyotaki andMoore(1997);and Greenwald and Stiglitz (1988a, 1993).


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the literature topartitionfirmsintogroups accordingtotheir likelihoodofbeingfinanciallyconstrained.8 The main cross-sectional criteria that havebeen used in this volume inorder to identifyfirms for which informationandagency problems aremoreor less severeareaffiliation with industrialgroups and banks,foreign ownership, and size.Businessgroupsare apervasiveform oforganization fou ndin a va-rietyofcountries, both developed (suchasJapan, Germany,and Italy)anddeveloping (such as Indonesia, Korea,andseveral Latin American coun-tries). B usiness groupscan beseenas anorganizationalform that helps tocope with information andcontract enforcement problems in the capitalmarkets.Theknowledgeby financialintermediariesorindividual investorsthat in case of financialdistress individual firms may also rely on the fi-nancial resourcesof the group islikelyto improve their accessto externalfinancial resources. Thediversificationof thegroup's activitiesis an addedbonus in this respect. Moreover, even in the absenceof financialdistress,business groups allow the fo rmati on of an internal c apital market that sup-plements the capital allocation functionof the external market. In somecountries, groups are organically linked with banks. Strong ties betweenbanks and firms represent apossiblew ay to reduce information costs. Inthis sense, firmsaffiliatedwith a business group would be expected to beless sensitive to cashflowbothbecause of themitigation of informationproblems inaccessing external finance (especiallyifthere arebank links)and becauseof the creation of an internal capital market. Direct foreigncontrol or foreign participation in ownership can obviously alleviate fi-nancing constraints forsimilar reasons. In this case,financingco nstraintsarealleviated bec auseit islikely thatfirmswithadegreeofforeign owner-ship will find it easier to access international capital markets.Sizeisanother c riterion that some chaptersuse toidentifyfirmsthatare more likely to be financially constrained. This is based on the pre-sumptionthat sizeis highly correlated with the fundamental factorsthatdetermine the probability of being constrained. Smaller firms are morelikelytosuffer from idiosyncratic risk and, insofarassizeispositively co r-related with age,arelesslikelyto have developed a track record that helpsinvestors todistinguish good from bad firms. Moreover, smallfirms may

8SeeSchiantarelli(1996)andHubbard(1998) for areview.


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FINANCIAL CONSTRAINTS INLATIN AMERICA 7

have lower collateral relativeto their liabilitiesand unit bankruptcy costsare likelytodecrease with size.And it islikely that transaction costsfor is-suing securities decrease with size.In anycase, theseandothercriteria usedin sorting firms are to a varying degree potentially endogenous. Hence,careshouldbetakeninaddressing endogeneityissuesin estimation.9As described above,one of the implicationsof theinformation-basedmodels ofinvestment isthat the severityof financial constraints islikely tovarywith overall macroeconomic conditionsandwiththestanceofmonetarypolicy because theyinfluencethevalueof f irms' networth.Itwouldtherefore

be expected that during recessionsorafter amonetary tightening,thecostofexternalfinancewould increase and/or accessto itwould decrease. Similarly,negativeshockstobalance sheets associated with depreciation, when part o fthe borrowingis in foreign currency,can beassociated with tighteningoffinancial constraints.The occurrenceofbankingcrises,oftenassociated with currency crises,can disruptand destroy information capitalthathadbeen accumulatedandleadsto arestrictionin thesupplyofloans. Thism ayleadtoseverefinancialconstraints forthosefirms that derive their externalfinancingmostly frombanks, with negative consequencesfo rtheir investmentdecisions.10The tightnessof financialconstraints over timemayvarynot only fol-lowing changesinbusiness cycle conditions andmonetary policy,but alsobecause of structural changes in financialmarkets. In the 1980sand early1990s, several developing countriesintroducedfinancialreformstofacilitatecapital accumulationandgrowth. Thesereformsconsisted mainlyof the re-movalofadministrative controlson theinterestrateand in theeliminationorscaling downo fdirected credit programs.Thereforms lowered barrierstoentry in the banking sector and stimulated the development of securitiesmarkets.Themain objectiveofbanking deregulationw as toprovide higherreturns to depositors and increasethe supply offunds for investment, al -though whether this ishappeningat the economy-wideleveli s amatter ofcontroversy.It islikely, however, thattheamountofsaving intermediatedby

9SeeSchiantarelli (1996)for adiscussion ofthis issue.10 See Bernanke (1983), Bernanke and Blinder (1988), Kashyap and Stein (1994), andHubbard (1994) for a fuller discussion of theconsequences ofshocksto credit supply an dthe implications for the transmission mechanism ofmonetary policy of imperfect substi-tutabilitybetween bank loansandother forms ofcredit.


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the banking system will increase.To the extent that thereareeconomiesofscalein information gathering andmonitoring,it ispossiblethat bankingintermediaries m ay haveanadvantage overthecurb(informal)marketin al-locating investmentfunds, andthism ayleadto areductionin thepremiumof external finance overinternalfinance. However,theeliminationofsubsi-dizedcredit programs will increasethe financingconstraints onthosefirmsthat previously benefited from the system of administrative allocation ofcredit.Thismeansthatfinancialliberalization programs havedistributionalconsequences,andwhether they relaxfinancingconstraintsfordifferentcat-egories of firms isultimatelyanempirical question.Financial Constraints inLatin America: MethodologyandDataThechaptersinthis volume provide novelandintriguing evidenceon thenatureandconsequencesofcapital market imperfectionsinLatin America,using data fromArgentina, Colombia,Costa Rica, Ecuador, Mexico, andUruguay.All thechapters sharethecharacteristico fbeing basedonmicrodata, mostlyfromfirm-levelbalance sheets.Inadditionto firm-leveldata,for Argentina the researchershad accesstoinformation ondebtcontractsandborrower characteristics collectedby theCentral Bank s Public CreditBureau.ForCostaRica,informationwascollectedbymeansof aspeciallydesigned surveyadministered to manufacturing enterprises.Some of the chapters investigatethe determinants of firms' financingchoices usingfirm-levelpanel data containing balance sheet information.Inparticular,they investigateeconometrically how firmcharacteristics, macro-economic conditions, and financialreformaffect theoverall degreeoflever-ageand/orthematurity structureof firms'debt.Fanelli,B ebczuk,andPradelli(chapter3)take this approach forArgentina,andJaramilloandSchiantarelli(chapter6) forEcuador. Fanelli, Bebczuk,andPradelli also present resultsonthe currency denomination ofdebt, whilelaramilloandSchiantarelli analyzethe effectof thematuritystructureofdebton productivity and investment.Monge-Naranjo andHall (2002) investigatehow the characteristicsof firmsand ownersat agiven point in time affect accessto bank finance, and howsuch accessaffectsseveral measuresof firmperformance, suchas investment,employment, and profitability. Adoptingand extending the approach byPetersenandRajan (1994), Strebandothers (chapter2 )provide evidencefor


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FINANCIALCONSTRAINTSIN LATIN AMERICA99

Argentinausing datafrom theCentraldeDeudoresonfactorsthat affect theaccessto and cost of bank credit, including the closeness of bank relationshipsandpast credit history.Other chaptersfocus onassessingthe presenceandseverityo f financ-ing constraints by focusing on firms' investment choices. Arbelaez andEchavarria (chapter4 ) take this approach forColombia, asdoes Castaneda(chapter7) forMexico.D eB run, Gandelman,andB arbieri (chapter8)focusoninvestment choicesinUruguay,andFanelli,Bebczuk,andPradelli(chap-ter 3) do thesame with regardtoA rgentina.All ofthese chapters shareacom-mo n methodological approac h, in that they are based on panel estimation ofaninvestmentequation containing,inadditionto aproxyforfundam entals,financial variablesthat capturethe availabilityo finternal sourcesof financeand the net wo rth po sition of the firm. The basic strategy, follow ing the spiritoftheseminalcontributionbyFazzari,Hubbard,andPetersen (1988),is totest whether these variables are significant for the firms that a priori arethought more likely to face info rmatio n and incentive problems. T he mea-surementoffundam entals isbasedoneither Tobin's averageQ orproxiesforthe present value of the marginal product of capital based on the sales-to-capital ratio. Error correction models forinvestment oraccelerator modelsare also estimated, inwhich case salesandsales growth capture profit op-portunities.11T hemeasuremento f networth is adifficult problem in an in-tertemporal context. Some of the chapters use cash flow as a proxy fo rinternal net wo rth; other c hapters use the stock of liquidassets.12Some chap-ters include additional balance sheet variables, such asleverage, in the in-vestment equation. W hatever thechoice,it isexpected tha tfirmsthat suffermorefromasymmetric info rmatio n problemsaremo re sensitivetovariationintheirnetworthor in theavailabilityofinternal funds.The estimation of both the financing and investment equations needstoaddressendogeneityissues.Theavailabilityofpanel dataisespeciallyim-portantbecauseitallowstheanalysttodeal withthepresenceof(relatively)firm-specific and time-invariant unobserved characteristics that appear as

11In one case (Uruguay),inadditionto the investment equations, theEulerequationfor thecapital stock isestimated, allowingfor the presence of aceiling on leverage and an interestratepremium related to leverage.12Note that cash flow capturesbothbalance sheetconditions and expectations of futureprofitability.


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componentsof theerrortermin theequations.Inaddition,some variables,even after removing such components by an appropriate transformation,are correlated with thecontemporaneous or lagged valuesof the idiosyn-cratic com ponen t of the e rror term . In the case of short panels, this calls forthe use ofinstrum ental variablesorgeneralized method ofmoments tech-niques.13Whereas therearewell-developed tec hniquesforaddressing theseproblems in the context of dynamic panel data models with continuousdata, the same is less true in dealing with models that have a discrete choicecomponent. This affects, for instance, the estimation of equations dealingwith accessto finance, and it istherefore more difficult togiveastructural/causal interpretation of the results. The same caution must be exercisedwhen resultsarebasedononlyonecrosssection.However, eveninthat case,the correlations captured in estimation prov ideuseful inform ation on the fi-nancing problems firms face and on the factorsthat may be associated withdifferent outcomes.

Overviewof theResultsWhat doesthe evidence suggest about firms' accesstobank credit and thematuritystructure andcurrency compositionofdebt?Inorderto discussthemain resultsand put themin them ore general contextof theliterature,table 1.1summarizesthe data sources usedand tables1.2 and 1.3summa-rize the models that have been estimated, the sample separation criteriaused,and theeconom etric methods. Starting withthecomposition ofdebt,Fanelli,Bebczuk,and Pradelli(chapter 3) present evidence that size (prox-ied by the fixed capital stock) has a significant positive effect on the per-centage of total debt that is of long du ration (1year or mo re) in Argentina.14The m aturity structure is also significantly related to the tangibility/durationof assets (measuredby theratioof fixed tototalassets)andthereisevidence

13 See Bond (2002) for a review of the econometric issues that arise in the estimation ofdynamic panels.14Theresults arebasedon asmaller pan elof 36companies quotedon theB uenos Aires StockExchangeand alargeroneprovidedbyINDECofapproximately 300 firms. The former hasaquarterly frequencyandcovers most of the1990s, whilethelatter isannualand is ofshorterduration.


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14 GALINDO ANDSCHIANTARELLI

that firms match the maturity structure of assets andliabilities.15Size andtangibilityarealso positively relatedto theproportion ofdebt denominatedinforeign currency . Finally, country risk, measuredas theemerging marketbond index spread, altersthe maturity structureofdebt in favor ofshort-term debt denominated indomestic currency, whiletheoppositeistrueforfinancial development, which is captured by the ratio of private debt togrossdomestic product.These results are in line with previous findings in the literature. Forexample,Booth andothers(2000)findthatfor asample of 10developingcountries (not including Argentin a), sizeandtangibilityareimportant de-terminants of debt ratios.16 Schmukler and Vesperoni (2001) analyzeasampleofsevendeveloping countries(includingArgentina) and find sim-ilarresults.GallegoandLoayza(2000)cometosimilar conclusions usingasampleofChileanfirms.Notably,Fanelli,B ebczuk,andPradelli(chapter3)do not find significant evidence of an increase in the proportion of long-term debtfor firmswith accessto foreignsourceso ffunding (capturedbyAmericanD epositary Rights or the ability to issue international bond s).JaramilloandSchiantarelli(1997)findthat sizeandtangibilityarecru-cial indetermining accessto and amount oflong-term debtforEc uadorianfirms.17Theseresultsareconsistent with several explanations.One issimplythat collateral is a prerequisite for obtaining long-term credit. Moreover,largerfirmstend to bemore profitable,sothis resultmayreflect a positiveassociation betweenfirmqualityandlong-term debt. Largerfirms arelikelyto have more bargaining power and greater political influence in obtaininglong-term financ ial resources, particularly through government-subsidizedprograms.JaramilloandSchiantarellifindthatestimationof an augmentedproduction function suggests thattheavailabilityoflong-termfinance mayhaveapositiveeffect on productivity. Perhapsthe availabilityoflong-termfinance facilitates access to moreproductive technologies, and this effect15SeeHart andMoore (1994)for atheoretical model.16 Moreover, theyfindthat ingeneral, debt ratiosin developing countries are affected in asimilar w ay by the same typesofvariables that appear significant instudies fo rdevelopedcountries. H owever, they note thatthe waycountry-specificfactorstendto affect debt variessubstantially across countries.17Their data sourceis theSuperintendenciadeCom paniasandconsistsofbalance sheetsfo rseveral hundred companies in 1984-92, therefore excluding the most recent crisisperiod.


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FINANCIAL CONSTRAINTS IN LATIN AMERICA 15

dom inates the positive incentiveeffects generated by mo re intensemonitor-ingand by the fear of liquidation associated with sho rt-termdebt.18Monge-Naranjoand Hall (chapter 5) present interesting evidence onthe source of credit for Costa Rican firms. They findthatwhile banks arethe most i m portant source of credit for larger firms, nonban k credit (tradecredit andinfo rmal credit)is theleading sourceoffunds forsmaller firms.Moreover, own funds and informal credit arevery important for newlycreatedfirms. Theprobability ofhaving accesstobank credit (or itsshareoftotal credit) ispositively relatedto firm characteristics suchassize,hav-ing formal accounting statements, and the existence of a long-term rela-tionship withabank. Surprisingly,it is not signific antly relatedto personalcharacteristics of the owners of the firm, such as education and age. Bothparametric and semi-parametricmethods fail to deliver statistically con-clusive results on the effectof access to bank credit on firm performance.The results suggest that bank credit c an have large positive effects on firmperformance, but such effects are notprecisely estimated.Streb and others (chapter 2) focus on the f inancing side of f i rmsin Argentina. How ever, unlike Jaramillo and Schiantarelli (chapter 6) andMonge-NaranjoandHall (chapter5),Strebandothersdo not addresstheissueof access to bank credit. Instead, they investigate the de termi nants ofthe availability and c ost of bank credit, condi tional on access, for firms thathavea relationship with the bank ing sector. The analysis uses the info rm a-tionc ontained in the Central de Deu dores records collected fromfinancialinstitutions by the B anco Central de laRepublicaA rgentina.19The data setis rich and the empirical work isbased on approximately 4,000 observa-tions. To measure the marginal cost of credit, Streb and others use over-drafts, the m ost expensive line of credit. The m easu re of the availability of

18 One disturbing result for Ecuador is that, conditional on size, greater profits do notincrease the probability of receiving a long-term loan. Moreover, conditional on access,profitability is negatively correlated with the length of the maturity structure ofdebt. Thisraises some questionson themechanism usedinallocating long-termfinancialresourcesinEcuador during the period covered by the study. Interestingly, the negativeeffect ofprofitsis greater before f inancia l l iberal ization, while afterward th e profit coeff ic ientincreases,but notenoughtomakeit positive.19F orotherwork using informationfrom the CentraldeDeudores,seeBerger,Klapper, andUdell (2000).However, they do not use information on the interest rates and balance sheetsof firms.


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creditisunused credit linesas aproportion oftotal liabilities withthemainbank.20

The availabilityof credit depends positivelyon the closenessof therelationship betweenfirms andbanks. Closenessismeasuredbydebt con-centration at themarginal bankand by the number ofaccounts withit.Favorable balance sheet characteristics (suchaslarge assets,ahighsales-to-assets ratio, and lowleverage)and agood credit history (a normal creditsituation withnoarrearsand nobounced checks) leadto improved creditavailabilityandlower cost.Inaddition, agood recordin thecredit registerisassociated with higher credit availability, suggesting thattheinformationcontained in theCentral deDeudores eases credit constraints for healthyfirms.This evidence supports the importance ofcredit registriesas one ofthe institutions that can help relax financing constraints (Pagano andJapelli1993; JapelliandPagano 2001). Another interesting resulti sthat,asthecredit situation deteriorates,theinterest rate doesnot increasemono-tonically. Thisisconsistent withacredit rationing storyinwhich increasesininterestrates beyondacertainlimitmayleadto adecreaseinbankprof-itsbyincreasingtheprobabilityofbankruptcy.

Whatcan belearnedfromtheestimationof theinvestmentequationsaboutthedifferences acrossfirms andover timein theseverityof financingconstraints?Theevidencepresentedby deBrun, Gandelman, and Barbieri(chapter8) forpublicly traded firms inUruguay suggests that, even withinthis group ofrelatively large firms, sizematters in the sense that smallerfirms display greater sensitivityto cashflow.21B ycontrast, the findings byFanelli,Bebczuk,andPradelli(chapter3) forArgentinado not support thepresenceofsignificant differences relatedto sizeintheir sampleof quotedcompanies.Arbelaez and Echavarria s (chapter 4 ) study of Colombia andCastaneda's(chapter7)studyofMexico, both basedonlarge samplesofsev-eralhundredfirms,22 present evidenceofgreater sensitivityto financialvari-ables suchascashflow or thestockofliquid assetsforindependent firms notaffiliated with business groups, confirmingthe roleofgroupsinmitigating20Petersenan d Rajan (1994)measurecreditconstraintsby thedegreetowhich firms resortto trade credit, whichi sgenerally more expensive than bank credit.21T hesample includes54 firms and covers1997-2000.22T hesampleforColombia includes14 0quotedand1,348 unquoted firms for1970-99.T hesamplefo rMexico includes 176quoted companies fo r1990-2000.


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financing c onstraints.23They also provide evidence that com panies with for -eign ownership (in Colombia) or those with affiliation with a bank (inMexicoin the firsthalfof the 1990s)arelessfinanciallyconstrained.Someof the c hapters in this volume also provide evidence on the tim e-varying nature of liquidity constraints. As predicted by many theoreticalmodels of investment based on asymmetric information, there isevidencethat episodeso f financial andcurrenc y crises, suchasthose that oc curredinthemiddleand at the end of the 1990s,areassociated withatighteningof fi-nancial constraints. This is true in both Colombia and U ruguay. In the lattercase, the worsening of financing constraints has affected mainly smallerfirms. No te that this is the first hard econo metric evidence, based on the es-timation of an investment function, on the effect of financialcrisis on theseverity of financing constraints. It co mp lements and extends the evidence inDomac andFerri (1999)for KoreaandMalaysia, based on estimation of avector autoregression model containing various measures of the interestspreads and production for the aggregateofsmallandlargefirms.Inchapter7 byCastaneda,theresultsforMexicoarepuzzling.Inpar-ticular, they suggest that independent f i rms were less sensitive to cashflowafter the 1995 crisis (coinc iding withtheN orth A merican Free TradeAgreement).G rou p m em bers did not display excess sensitivity pre o r po st-1995.T hefact that group membersdid not display excess sensitivity durin gthesecond halfof the1990s, despitetheproblemsaffecting thebanking sec-tor, isconsistent with the idea that groups lessen financing constraintsbycreatinganinternal capitalmarket.24It ismoredifficult toexplainthe resultfor independent firms, unlessthe analysis assumes that firms that have in-ternal liquidity or access to capital markets, such as export-oriented firms,recyclefunds toindependentfirms, forinstance through trade c redit,assug-gested byCastaneda.25 A ni nteresting resultisthat firms that were affiliatedwith abank experienced greater financingconstraints in the second halfof23Harris, Schiantarelli, and Siregar (1994) obtain similar results for Indonesian establish-ments,asdoesCho (1995) forKorean firms.24

Castanedasuggeststhatgroupstructuremayhavebecometighterin thesecondhalfof the1990sas aresponse to theproblemsof the financialsector. However,healsonotes thatonepieceofevidence is notconsistent withthisstory, namely,the factthatthecoeff ic ientoftotalgroup liquidity issignificant only in the pre-1995 period.25Corroborating evidenceis the fact thatthe coeff ic ient for the stockof cash is not signifi-cant forexportingornonexportingfirms in thesecondperiod.It is significant onlyfor ex-portingfirms in the firstperiod,which is somewhat puzzling.


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the 1990s, which is not surprising giventhe continued weaknessof the fi-nancial sectorafterthecrisis.TheMexican experienceis asourceofbothuse-ful lessonsandunresolved puzzles that requirefurther investigation.There isevidence that financial liberalization has relaxed financingconstraints forinvestment in Colombia, wherefirms thatare not mem-bersof agroup have benefitedmorefromtheliberalizationof the finan-cial sector. This result complements and extendsthe findings byHarris,Schiantarelli,and Siregar(1994) for Indonesia. Theyfind that smaller orindependent firms experienced a relaxation in constraints, while largerfirms or members of industrial groups were not constrained before orafter liberalization.26More recently, using data onquoted companiesforseveraldeveloping countries from Worldscope and atime-varying indexof financial liberalization, Laeven (2000) finds that financial liberaliza-tionrelaxed financing constraints forsmaller firms. Love (2000), usingalarger panel fromWorldscope, including developed countries, providesevidence thattime-invariant measuresof financialdevelopmentareasso-ciated with arelaxation ofconstraints for smaller firms in the context ofEulerequations. More important for thepresent purpose, Harrison, Love,and McMillan (2001),usingthe same data set,findthat measureso ffor-eign direct investment in acountry relax financing constraints for firmsthatare not membersofmultinationals indeveloping countries. Thisev-idence shows that foreign direct investment,bybringinginscarce capital,may ease domestic firms' credit constraints. However, if foreign firmsborrow heavilyfrom domestic banks, theym ay crowd local firms out ofdomesticcapital markets.The empirical results suggestthatthe first effectdominates.27

PolicyConsequences andConclusionsTheresults contained inthis volume helptoexplainhow thetightnessoffinancial constraints varies across different types of firms and over time.26Jaramillo,Sc hiantarelli, andWeiss(1996)find,instead, thatfinancialliberalizationdid notsignificantly relax financingconstraintsfo rsmallfirms inEcuador.27However,Harrisonand McM illan (2002)findthatborrowingbyforeignfirms exacerbatesthecredit constraintsofdomesticfirms inCoted'lvoire.


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Firmsthathave accessto foreign funds, for instance viaownership links,appearto beless constrained,as do firmsthat have accesstointernal creditmarketsofbusinessconglomeratesorthatcan usegroupmembershipas awaytoimprove accessto external funds.Financialliberalizationcanhave positiveeffects onreal activityby re-laxingfinancialconstraints. Adirect implication that isderived from thisstudyisthat policies thatpromoteliberalizationof financialmarkets(in di-mensions suchasremoving interest rate controls, reducingthe roleof di-rected credit,and allowingfor foreign participation indomestic markets)can increasefirms'accessto credit.On the onehand, eliminating restric-tionson how financialinstitutions needtoallocate creditormanage theirrisks allows themtoincrease their efficiency inallocating resources towardfirmswith higher returnstoinvestment.28On theother hand, liberalizationis usually accompaniedbycapital account liberalization policies that allowfirms to improve their accesstoforeignfundingsources.Inthis respect,thestudies undertaken forthisvolumefindthatthese policiescanhelpto easeconstraintsbyallowingfirms in ahost countrytoaccessthe financialmar-ketso f thehome countriesoftheir parent companies.Currencyand financialcrises increasethetightnessof financialcon-straintsand canhave severe realcosts.Thisemphasizes the importance ofprudent monetaryandbudget policies that minimizetheriskof a financialcrisis.Moreover,i talso putsi n sharp reliefthe important roleof asystemof prudential regulation and supervision that reduces the probability ofepisodes of excessive credit expansion and risk-taking by banks (WorldBank 2001). Sound macro policies and effective prudential regulationsare crucial in avoiding th e risk that financial liberalization m ayexacer-bate the probability of afinancial crisis,assuggestedby D emirgu9-Kuntand Detragiache(1999).The results alsosuggestthat the impact of acrisisis notequal acrossfirms. Firms that have tiestoexternal sourcesoffunds,viaexportsorown-ership links, appearto belessconstrainedin thepost-crisis period. Thisre-sult shows that policies that support opennessarefundamentaltoalleviatethevulnerabilityof therealand financialsectorsto international shocks.2928Galindo, Schiantarelli,an dWeiss (2002) find that financial liberalization infact increasesthe efficiency ofinvestment.29For adiscussion from amacroeconomicperspective,seeCalvo,Izquierdo,andTalvi(2002).


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Moreover, policies that support foreign participationindomestic marketscan reduce the vulnerability of firms, at least from external shocks of amoderate size.Thedebt structureof firms isstrongly determined bytheir sizeandthe tangibility of their assets. Thisreflects,among other things, the impor-tance of the collateral that firms are able to pledge in accessing credit: firmswith greater collateral have access to longer-term debt. From a policy per-spective,theimportanceofcollateral should attract attentiontoputtinginplace institutions, rules,and regulations that facilitate the effective use ofvarious assetsascollateralinLatin American countries.At ageneral level,the concern shouldfocuson policies and institutions that enforcecreditorrights, which areextremely unprotected inLatin America (LaPorta andothers 1997;L aPorta, L6pez-de-Silanes,and Shleifer 1998).30Specifically,thereis theneedtodevelop instrumentsandinstitutions that facilitatetheprocessbywhichfirms aswellasindividualscanregister their propertyasassetsthat can then be used ascollateral.31

Information sharing, documentationofcredithistory,and theade-quate functioningofcredit registriesareimportant toolsforreducing theimpactofinformation asymmetries and, hence,financingconstraints. Theavailability of credit history information has been shown to be crucial forsoundlendingdecisions.32Greater availability ofinformation reducesde-fault ratesandincreases accesstocredit, andbetter-informed lendersareableto providebetterfinancialservicesto borrowers.Inorder to exploit thebenefitso fcredit registries,anadequate legalframeworkthat encourages information sharing among lenders mustbe inplace.Inthis regard, bank secrecy laws, whichcanrestrict informationflows,haveto bereviewed. Similarly, lawsthatimpose limits on credit reportingcanhinder the usefulness ofcredit reporting agencies. However, rules that30 See also Levine (1998); Claessens and Laeven (2002); and Beck, Demirgiic-Kunt, andLevine (2002)on theeffects ofinstitutionson financialdevelopmentand growth.31AsshownbyLora,Cortes,and Herrera(2001),thesizeof firms allovertheworldtendstobepositivelyassociated wi th the qualityof institutions,namelyinstitutions that protectpropertyrights. Where property rights tendto beprotected,entrepreneursare inlessriskofexpropriationandhencetendtoincreasetheirinvestmentsintheirfirms.Thisresearchpro-jectalsosuggeststhat thosetypesofpoliciesthatallowfirmbuilding alsoalleviatecredit con-straints.32Note thataccurate credit information can have greater predictivepowerfor the perfor-manceof firmsthanthedata containedin financial statements(Japelliand Pagano2001).


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impedethe improperuse ofcredit information must existinordertoguar-anteeanadequate balance betweenthebenefitsderived from the protectionof individual privacyand those from information sharing. Moreover, it isimportant tominimizetherisk that information sharingmayharmthe se-curityandwell-beingof thepeoplewhoappearin theregistry.Although thereisstill muchto belearned,thestudies collectedinthisvolume representsignificantcontributions inunderstandingfirms' financ-ingandinvestment decisionsand theconstraints theyfaceinLatin America.The evidence shows how firms' characteristics and the evolving natureofcapital markets shape those choices and affect the severityof constraints.These results bearsignificantpolicy implications, and it ishoped that fur-ther empirical work basedonmicro data will makeitpossibletosharpenthepresent conclusionsandprovide answersto themany important questionsthat still needto beaddressedinthis areaofresearch.


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CHAPTER 2

TheEffectofBankRelationshipsonCreditforFirmsinArgentina

Jorge M . Streb,JavierB olzico, Pab lo D ruck, Alejandro H enke,JoseRutman,a nd WalterSosa Escudero

This chapter seekstoevaluatethe determinantsof thevariation in the costand availability of bank credit across firms in Argentina. This is a high p ro-fileissue,asmany A rgentinefirmsloudly protestthehigh costo fbank creditand the difficulty ofobtainingit.While the same grievances arevoiced inmany countries, in Argentina these complaints arise against a backdrop offinancialmarkets thatareparticularly underdeveloped, notonlyincompar-isonwith those of OECD countries, but also with those of other emergingmarket countries, such as Chile (Caballero 2000). Stock market capitaliza-tion islow,as is financialintermediation intermsof the ratioof M3moneysupplytogross domestic product (G D P)or ofloansto theprivate sectortoGDP. Tocomplete this picture, high country riskand crowdingout by thepublic sector have made credit constraints particularly acute for firms inArgentinasince 2000.In light of the limited options presented by weak capital markets, bankcredit isparticularly critical for firms in Argentina.1There are fewer than100firms listed in the stock exchange, while the financial system grants c reditto more than 100,000 legally incorporated firms. Thus, asdefinedby Mayer(1994), Argentina can clearlybe classified as a banking economy, with asmall proportion of listed firms, as opposed to a market economy, whichwould haveahigh percentageoflisted firms.JorgeM .Streband Pablo Druckareprofessorsofeconomics at the Universidad de lCEMAin BuenosAires; Javier Bolzico, Alejandro Henke, and Jose Rutman are affiliated with theBanco Central de la Repiiblica Argentina; and Walter Sosa Escudero is affiliated with theUniversidad Nacionalde laPlata.1Al lfinancialinstitutions supervisedby thecentral ba nk willhereafterbereferredto as banksfo r short.


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In Argentina, changesin thecostof andaccesstocredit overthepastdecadeor sohavebeen substantial.Therewaspracticallynocredit marketin 1990.Bankshadimploded and the fewassets theyhadwere concentratedin government securities. After the Convertibility Plan waslaunched in1991,withthe aim ofachieving price stability, lendingto firms had to startalmost from scratch.Sinceittakes timeto generateatrack record foreval-uatingtheriskoflendingto firms, it is nosurprise thatfirmsshould initiallyhave beensubject to large individual credit constraints. Over the courseofthe 1990s,banks compiled internal informationontheir clientfirms astheirlending relationships developed, and private credit bureaus and publiccredit registers developedtopool this kindofprivileged information.The present goalis to see howthesedifferent bitsandpiecesof infor-mation affect thecredit constraints faced by firms. In the empirical litera-ture, however, thereis nostraightforward proceduretodetectthepresenceof credit constraints. Usually,the presenceof credit constraintsisdetectedindirectly, for example, by excess sensitivity of investment to liquidity(Schiantarelli 1996).This chapter proposesadifferent approachto analyz-ing creditconstraintson e that isclosest in spirit to Petersenand Rajan(1994),whomeasurecredit constraintsby thedegreetowhichfirmsresorttotrade creditto financetheir operations. Rather than using trade creditasayardstick,however,welookat thelackofunusedcreditlinesas anindica-tor ofcredit-constrainedfirms,usingacross section forOctober 2000 builtwith data collected from financial institutions by theBanco Central de laRepublicaArgentina(BCRA).Thehighest observed interest rate paidon themost expensive type ofloan, overdrafts, isused to measure the marginalcostofbank creditfacedby a firm.This credit option shouldbe thelastre-sortof the firm,which would rationally attempttoexhaust cheaper sourcesof creditfirst. Thechaptertherefore focuses on the intensivecredit margin,whichrefers to howmuch creditisavailableto a firmthat already operateswithin the financialsystem. Since dataare not availableon firms that havenot receivedanycredit from the financial system, the chapter cannot ex-plain extensive credit marginsthat determine whethera firm is cut off frombank loans.Theanalysisfindsthatthe availabilityofcredit depends positivelyonaclose relationship withabank. Favorable characteristicsof a firm(largeas-sets,ahigh return to assets,ahigh sales/assets ratio,and a low debt/assetsratio),good credit history (normal credit situationand nobouncedchecks),


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and collateral also lead to higher credit availability. Significantly, a goodmedian credit situation in the public credit register leads to higher creditavailability, suggestingthattheCentraldeDeudo res eases credit con straintsfor healthyfirms.Withregardto thecostofcredit,the findingsmostlypar-allel those of credit availability. The cost is lower for a firm with a close re-lationship with a bank. F irms with large assets, a high sales/assets ratio, andalowdebt/assetsratio pay a lower interest rate ( retur ns o n assets, however,turnout not to be signif icant) .A good credit history and collateral alsoreducetheinterest rate.

Animportant difference betweentheeffects on thepriceand quantityofcredit is that as the credit situation deteriorates, the interest rate does notincreasemonotonically,although credit availability does decreasemonoton-ically. Similarly,themedian credit situationin thepublic credit register doesnot affect the cost. These findings are consistent with credit rationing, whichpredicts that beyondacertainpointitmakesno sensefor thelendertoraiseinterest rates because that would only increase the probability of default.Rather, as risk rises, lenders will cut bac k on the su pply of credit.

ConceptualFrameworkTheoretical LiteratureInformat ion asymm etries are a central issue in credit m arkets. Freixas andRochet (1998) distinguish between three sets of asymmetric information:exante (adverse selection), interim (m oral ha zard ), and ex post (the costlystate verification model, w hichc an berelated to expost m oral hazard).In thetheoretical literature, asymmetric inform ationhasbeen identi-fiedas the source of equilibrium credit rationing because asymmetric infor-mation pushes the market away from a perfectly competitive equilibriumwherethe intersection ofdemand and supply clearsthem arket. TheclassiccontributionbyStiglitzandWeiss(1981)predicts thatalender's expectedre-turn on a risky loan is anonmonotonicfunction of the interest rate. This canbe dueeither toadverse selection, becauseasinterest rates risethebest bor-rowers drop out, or to moral hazard, because at higher interest rates bor-rowersadopt riskier strategies. Henc e, lendersmay not bewillingto supplymo re credit beyondacertain interest rate. Thismayleadto acredit rationi ng


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26 STREBANDOTHERS

equilibrium, where borrowersarewillingtodemand more than theyaresup-pliedat the equilibrium interest rate. This typeofcredit rationingis an in-tensivelimit,ortype 1credit rationing. Iflendersrefuse outright to supplyany loansat all tosomeo f theprospective customersat theprevailing inter-est rate, the borrower faces instead an extensive limit, or type2credit ra-tioning.Forexample, thisis thecasein thecostly stateverificationversionofcredit rationinginWilliamson (1987).Banks are precisely the organizations that specialize in collectinginformation onpotentialborrowers to pricecreditrisksappropriately.2Toalleviate the degree of asymmetric information, banks resort to differentmechanisms. A common practice by banks is to implement screeningmechanisms (i nwhich case goodfirmshaveanincentivetosignal their typeinordertodif ferentiate themselves frombad firms and getbetter termsontheir loans). Another responseto theproblemofasymmetric informationisthedevelopmentofprivate information through banking relationships.In this regard, Petersenand Rajan (1994) distinguish between publicand private informationinlending activities. Private informationis the infor-mation that lenders acquirein the courseofrelationships withborrowersinformation that is not easilytransferable to others. Alongthe same lines,Berger, Klapper, and Udell (2000) contrast relationship lending with puretransactions lending. Relationship lendingisbasedoninformation gatheredbythe lender through contact over time withthe firm, itsowner,and thelocal business community. Pure transactions lending isbasedon informa-tionfromfinancialstatements, credit scoring,andother similar quantitativetechniques. This information isrelatively public and transparent and onlyrequirestheanalysisofcurrentlyavailabledata.The ideaofrelationship lending isillustrated inAkerlofs (1970)ex-ampleoflocal moneylendersincredit marketsinIndiawho canlend prof-itably because of their knowledge of local borrowers creditworthiness.Outside middlemen tryingto arbitrageinthat market, lendingat thesamehigh rates, would lose moneydue to the riskofattracting borrowers withpoor repayment prospects.Theemergenceof financialintermediaries suchas bankscanthusbeexplainedas a way tosolvetheproblemofasymmetricinformation in financialmarkets.2Bankscanalsobeimportant inmonitoring borrowers, thus solving corporate governanceproblems relatedtomoral hazard (Allen2001).


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Relationshipinformation isespecially imp ortant for small firms be-causethey producelesspublic inform ation than largefirms,whichcan in-stead resort directly to capital markets to place debt (Diamond 1991b).Relationships affect theb ank-f irm interaction in atleast two dimensions.Concerning the amount of credit, Diamond (1984) shows that relation-ships allow a firm to have mo re access to c redit. W ith respect to the cost ofcredit,there is no clear-cut association betweeninterestratesandrelation-ships. On the one hand, D iam ond shows that a relationship with a singlebankmayreduc e risk, leadingto alower interest rate charged.Thereduc-tionininterest ratesis duebothto themonitoring roleof thebank, whichreduces the incidenceo fmoral hazard,and to an improved knowledgeofthe firm, which helps to overcome the problem of adverse selection. On theother hand, relationships provide a bank with inside information about thefirm's financialhealth andprospects.Thebankthatlendsto a firmlearnsmore about it than other banks do. This information advantagegives thebank market power over the firm, allowingthe bank to extract rents at-tributable toknowingthattheborrower isless riskythan average (Sharpe1990).In summ ary, therearetheoretical justificationsforboth increasinganddecreasinga firm'sinterest rate with closer relationships.Whether other i nformation is private or public depends on the regula-tionsinplace, suchaslawsofhabeas data that guarantee privacy. Public creditregistersandprivate credit bureaus that pool lender info rmation reducethedegree ofasymmetric information. Since inform ationiscostlytoproduce,ifitbecomes public other lenders might haveanincentivetofree rideandlureawaythebanks' best clients through competitive rates. This might reducethe incentiveso fbanks to invest in relationship lending in the first place.While this may be the case for positive information on borrowers, negative in-formationhelpstodiscipline borrowers, reducing problemsofmoral hazard.Asymmetricinformationandagency problemsare not theonly sourceofcredit market distortions. Forexample,aninefficientlegal systemmay di-minish the value of collateral, leading to acredit-constrained equilibriumwhere firms cannot take advantageof all their worthwhile investment op-portunities despitetheguarantees theycanprovide. Evenifthereis nocreditrationing, firms suffer from credit constraints due to theseinefficiencies be-cause interest ratesriseto clearthemarket. These problems cancontributetoweak internationalfinanciallinksand anunderdeveloped domesticfinan-cialmarket (Caballero andKrishnamurthy 1999).


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EmpiricalLiteratureMuchof theliteratureoncredit constraintsfacedby firmsfocuseson the ef-fectsoninvestment, whichcan bedetected through theexcess sensitivityofinvestment to liquidity.3There isalsoaspecialized literature that looksathow bank relationshipscanhelp ease liquidity constraints faced by firms.Hoshi, Kashyap,andScharfstein (1990a),forinstance, show that thebene-fitofbank association forJapanesefirms isthat itreducestheexcess sensi-tivityofinvestmentto cashflow intimesof financialdistress.

This chapter takesadifferent tack.The present approach resemblesPetersenandRajan s(1994)studyinattempting tolookmore closelyat theissueofcreditavailability.The keyinsightinPetersenandRajanisthattheuseoftrade creditcan be anindicationofcredit constraints. Intheirstudyof small businessfirms in theUnited States,theaverage rateonbank loansis1percentamonth,or 12percentayear. They calculate thatfirmsthatdonottake discountsforearly payment forsakea 2percent discounttostretchthepayment periodby 20days, equivalentto a 3percent monthly interestrate,or a 44percent annual interest rate. Accordingly,theauthorsuse thepercentage ofdiscounts taken forearly paymentas an indication of firmsthat do not face credit constraints because they have access to cheapercreditfrom the financialsystem. Conversely,thepercentageoftrade creditpaid lateis anindication ofcredit-constrainedfirms.If trade credit discounts takeni s anindirect indicator ofcredit avail-abilityinbanks,analternativeis to try to assessdirectlytheavailabilityofcreditinbanks. Thisi sm eaningful ifline-of-creditcontractsor loan com-mitment contractsareimportant sourcesofloans. MelnikandPlaut(1986)state that loan commitment contractsarebehind more than70percentofcommercial and industrial loans in the United States. They studythe exante trade-offsbetween thesizeofloan commitments andother variables,suchas theinterestrate premium chargedandcollateraloffered.Since theyconcentrate on the exante determinants of line-of-credit contracts, MelnikandPlaut provideno evidenceoncreditconstraintsper se.Theydo men-tionthatcredit constraints can beinterpreted as the expostusageofcreditbeyond these loan commitment contractswhenfirmshavetoturnto spotloansathigher rates.Schiantarelli (1996)provides a survey of this literature.


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Regarding the effect of banking relationships on access to credit,PetersenandRajan (1994)showhowtheir measuresoflending relationshipsare relatedtoreduced relianceontrade credit. They interpret thisin thesensethatfirmswith closer relationshipsfacefewercredit constraints, having moreaccessto cheaper bank credit. Later studies, using different measuresofcredit availability, alsofindthat relationships leadtomore accessto credit.Cole (1998)findsthatapotential lenderismore likelytoextend creditto afirm with which it has a preexisting relationship. Machauer and Weber(2000)findthata firmobtainsahigher proportion of financingfrom abankwith whichit has acloser relationship, usingasdependent variabletheratioofthetotal credit lineateach bank relativeto thetotalassetsof the firm.Usingtheinterest rate paidon thelast loano feachfirm,PetersenandRajanfindthat lending relationshipsaffect th equantityo fcredit more thanthey affect the costofcredit.Ahigh number ofbanks signals weaker rela-tionshipsand isrelatedto ahigher cost ofcredit,but the lengthof the re-lationship doesnot affect interest ratesat all.However, Berger an d Udell(1995) alsouse the interest rate paidon thelast loanto findthat borrow-ers with longer-term banking relationshipspaylower interest rates. Theyrestrict their analysistolending under linesofcredit.A recent studybyD'Auria,Foglia,andMarullo-Reedtz (1999)estab-lishes that close relationships reducetheinterest ratea firm ischargedo nuncollateralized overdraft facilities, usingas aproxyofclose relationshipsthe shareof each bank over thetotal credit lines grantedby the bankingsystem toindividual borrowers. They also controlfo r thenumberofbanksasameasureofcompetition, whichofcourse interacts withtheconcentra-tionofcreditin abank. Their interpretation of theresults implies that hav-ing closer relationships leadstolower rates,bu t there is aholdup problemifa firmoperates exclusively withonebank.Asmall degreeofcompetitionamong banks reinforcesthereduction in the firm'sinterest rate, while fur-ther increasingth enumberofbanks leadstohigher interest rates.Combining the approachesinPetersenand Rajan (1994) andMelnikandPlaut(1986), this chapter utilizestheunused portionof precommittedcredit linesas ameasureof firmsthatare not credit-constrained. Unusedcreditlinescan beinterpretedas anintensive,no textensive, measureofcreditconstraints. Anextensive credit constraint is thecase whennobankiswill-ingexanteto signaline-of-credit contract witha firm . All the firms in thepresentsample have bank credit,sotheydo not face this typeo fconstraint


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(except a few firms in the samplethatonly havewrite-offs). However, eventhosefirmsthataregivenacreditlinefaceamaximum creditlimitor com-mitment. This limit is potentially an intensive credit constraint. Firms that expost have unused credit lines are not credit-constrained, but the lack of un-used credit lines may provide direct evidence on firms that face intensivecredit constraints.Italso appears that unused credit linesmay be alessam-biguous measure of credit availability than the total debtfiguresthatareoften usedin theliterature.

DataAdatabasewasassembled, drawing inform ation mainlyfromtheCentraldeD eudores del Sistema Financiero (D ebtor Center of the F inancial System)oftheBCRA.Theinformationon firmsincludes inco rporatedfirmsthatarelarge debtors or principal debtorsof the financialsystem, which does notnecessarily mean that they are large firms.

The data set consists of a cross section of interest ratesand debtoffirms with each individual bank for October 2000. Previous researchersworking with Central de Deudores, such as Berger, Klapper, and Udell(2000), did not use firms' interest rate and balance sheet information be-causethey considered the inform ation to be too unreliable, if not altogetheruseless.To overcome the drawbacks in the underlying information, exten-sive preparatory groundwork wascarried outbeforethe econometric esti-mates were ru n.Assets of FirmsBalance sheet information was collected on 17,809 firms, of which 17,394reported positive assets. However,not all theinform ationwasequallyreli-able.Twoalternative approaches were followedtoscreenout noisein theinformation. First,filterswere usedin anattempt to eliminate problematicobservations. An alternative validation process was then formulated thatdistinguished different degreesofreliabilityof the inform ation.44 This process is discussed in the working paper on which this chapter is based, Streb andothers(2002).


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BANKRELATIONSHIPSANDFIRMS IN ARGENTINA 31

Table 2 .1. A s s e t s of Firms in the Complete Sample(Thousands of pesos)SectorUnclassifiedAgriculture, fishing.

or livestockMiningIndustryElectricity, water,or gasConstructionWholesale orretail

distributionServices

Cases1,7763,076

1113,548

1251,0522,947

3,161

Minimum0.10.1

0.10.1

11.90.10.1

0.1

Mean6,108

15,106

96,35168,018

369,14523,406

19,400,000

207,216

Median1,5742,130

4,4113,409

63,2532,5192,039

2,820

Maximum780,710

24,400,000

4,363,000126,000,000

9,719,9205,915,785

57,000,000,000

426,000,000Note: The completesample consists of 15,796 firms in Argentina in 2000.Source: Banco Central de la Republica Argentina.

In the figures on the domestic financial system in October 2000, only16,095of the 17,809firmsappear,inpart becausethebalance sheet infor-mation ismostly from 1997, 1998, and 1999. Of these 16,095 firms, 15,796hadpositive assetsinOctober 2000. These 15,796firms formwhatwereferto as the complete sample. We also use three subsamples of information,whichweregardasmore reliable thanthecomplete sample. Table2.1showsthe assetsof the firms in the complete sample classified according toeco-nomic sector (note that 1 peso = 1 dollar). Table 2.2 shows the assets of firmsin themost reduced sample. This subsamplesatisfiesajournalistic require-ment, thatis,thattwo ormoredifferent sourcesagreeon theoriginal infor-mation. In the most restrictive subsample, most of the outliers of thecomplete sample areeliminated.5However, this reduced sample is made upofonly alittlemore than a quarter of the firms, and the median size of assetsisaround twice as large as in the complete sample.

An intermediate subsample adds to this reduced group the firmswhose information has been reported on at least twodifferentdates to theBCRA,inwhich casethemost recent datewaschosen.Forthis intermedi-atesample of 5,849 firms, table 2.3 shows the relation between their liabil-ities in the financial system and the book value of their assets in October2000.Although therearestill outliers, the informationon assetsisbetterOne ofwhich exceededthe sizeofArgentina'sGDP by afactor of200.


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32 STREBANDOTHERS

Table2.2. AssetsofFirmsin theMost ReducedSample(Thousandsof pesos)SectorUnclassifiedAgriculture,fishing.

or livestockMiningIndustryElectricity, water, or gasConstructionWholesale o r retail

distributionServices

Cases210528

371,352

66369947

908

Minimum12.0

1.0

226.60.1

12.058.40.1

0.1

Mean10,24211,209

84,632145,819280,561

24,53216,978

44,842

Median4,2014,333

6,2828,271

132,4175,3254,314

5,696

Maximum332,296482,676

1,371,330126,000,000

1,993,481773,847

1,720,693

6,281,000Note: The most reduced sample consists of 4,417 firms in Argentina in 2000 that satisfy validationcriteria 1/2/3/5/7 in appendix A in Streb and others (2002).Source: Banco Central de la Republica Argentina.

than in the complete sample (not shown). This subsample of firms is thepreferredinformationset for theeconometric estimations.BankLiabilitiesTheinformation oneachfirm's liabilities withthe financialsystem coversfour items: loans, unused credit lines, sharesnot quoted on thestockex-change,andw rite-offs.Although unused credit linesare apotential liability,weusebank liabilities todenote theaggregatefigure forpurposes ofsim-plicity. This information onquantities isvalidatedby the BCRA:thetotalfor each item, added up over all the clients of each bank, has to agree withtheamount reportedby thebankto theBCRAon itsbalance sheet.Ifthesetotalsdo notcoincide,theinformationi srejected.Table 2.4shows the liabilities for thecomplete sampleof firms(in-cludingthose that only havewrite-offs) forOctober 2000.Theaverage num-ber ofoperations refers to theaverage number ofbanks with whichfirmshaveaccountsforeach line.

AccordingtoInformaciondeEntidades Financieras publishedby theBCRA,liabilitiesin thewholefinancialsystem in September 2000 totaled102billion pesos,ofwhich36billion corresponded topartnerships and soleproprietorships (5,162,305 cases)and 66billiontocorporations (116,960cases).The complete database of 16,095 firms adds up to 48 billion pesos in


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34 STREBANDOTHERS

Table 2 .4. Bank Liabilities for the

ItemLoansUnused credit

linesUnquoted

sharesWrite -o f fsTotal

Total(thousandsof pesos)4 1 , 4 6 0 , 4 1 4

4 ,892 ,558

1,209,843

720,3954 8 , 2 8 3 , 2 1 0

Total/numberoffirms

2 ,576304

75

453,000

Complete S ample of FirmsFirmswithline

(percent)96.241 . 9

1 .1

9.3100.0

Total/firmswithline

2,677726

7 , 1 1 7

4833,000

Averagenumber ofoperations

3.11 .6

2 .1

1 .93.3

Total/number ofoperations

850454

3,467

2 51905

Note: The complete sample consists of 16,095 f irms with bank liabilities reported in October 2000 inArgentina.Source: Central de Deudores, Banco Central de la Republica Argentina.

October 2000. Thesefirms represent nearly15percentof the corporations,butmore than75percentof thedebtofincorporatedfirms.

StartinginOctober 2000,adetailed breakdownofloansisavailable.Theloansare classified into 17different types (table 2.5). Table2.6givesabreakdownof unused credit lines into fourcategories. Banks have to pro-vision unused credit lines for losses in the same manner as with actualloans. If banks include a clause that allows them to revoke the credit line atanymoment, they are not obliged to inform theBCRAof the unused por-tion. Hence, the unused credit lines that arereported represent unusedportionsofloancommitmentcontracts.

Information oncollateralforeach typeofloan andunused line-of-credit line is also available. Collateral is divided intoguarantees of type A(the best), typeB, andtypeC (nocollateral).InterestRateson LoansInterest ratesoneach typeofloan,aswellas theaverage duration oftheseloans,areavailableforOctober 2000.TheBCRAhas not yet implementedavalidation procedure similar to that applied to quantities, so interest ratefiguresarenot very reliable.6The validated interest rate information is pre-sentedintable 2.7.6Adescriptionof howthisinformation wasprocessedappearsin appendixB inStreb andothers(2002).


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36 STREBAND OTHERS

Tab le 2.6. Breakdow n of Unused Credit L i n e sTotal Total/ Firms Total/ Average Total/

Type of (thousands number withline firms numberof numberofcreditline of pesos) off irms (percent) with line operations operationsOverdraft

facilitiesEventual

liabilitiesGuarantees

grantedEndorsements

and externalcredit lines

381,926 24

1,155,193 72

2,790,482 17 3

564,957 35

29.0

9.9

15.8

0.5

82 1.3

726 1.6

1,094 1.3

6,494 1 .0

64

462

838

6,348

Source: Central de Deudores, Banco Central de la Republica Argentina.

Bank overdrafts are, on average,the most expensive typeof loans.Information oninter-financial loansisdisregarded because these ratesap-pearto be greatly underreported in the transformed sample, accountingfor less than 2percent amonth in2000. Furthermore, this typeofdebtdoesnot qualify for thesample that targets nonfinancial firms. The onlyother rate thatisclosetooverdraftsis therate chargedoncredit cards.

Marginal Costof Credit

Themeasureof themarginal costofcreditis thehighest observed interestrateonoverdrafts paidby a firm in the financialsystem. Applying this def-inition, the marginal rate turns out to be slightly above 3 percent a month(withsmallfluctuationsaccordingto the specificsubsampleof firmsused).Thehighest observed interest rate chargedon anytypeofloan could havebeen used instead,but in 85percentof thecasesof firmsthatuseoverdrafts,the highest rate is indeed the rate charged on overdrafts. As to the relevanceoftheinterest rateforoverdrafts,table2.5shows that65percentof the firmsin thedatasetusedoverdraftsinOctober 2000.Anadvantage of only using overdrafts is that they represent a homo-geneous typeofloan that reduces theinfluenceofunobserved loan char-acteristics on the cost of credit. The rate charged on overdrafts can bereviewedmonthly. Althoughoverdraftscan berolled overand do nothave


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BANK RELATIONSHIPS AND FIRMS IN ARGENTINA 37

Table 2.7. Interest R a t e s in V alidated SamplePercent)

Validated sample

Typeof loanOverdraftsDiscountedbills - guaranteeABills and promssory notesHousemortgagesOthermortgagesCar loansOther pledgesPersonalCredit cardInterfinancialTo guaranteed public bankOther loansOther f inancialLeasesMiscellaneousSmall personal

Mean2.542.221.281.041.141.411.271.822.434.970.911.391.071.251.091.12

Median2.042.171.191.021.081.461.201.752.590.750.901.281.001.280.990.99

Standarddeviation

1.60.40.50.20.60.30.90.70.9

19.90.10.80.50.30.80.2

Cases315,529

2013,465

772,724

5092,530

5301,727

1327

5,4881,282

48147

5

Totalcasesb23,720

2119,517

1034,589

6605,2791,1983,283

2167

9,7127,3271,323

595

a Restricted to rates with monthly values greater than 0.1.bTotal cases in the complete sample.Source: Central de Deudores, Banco Central de la Republica Argentina.

a specifiedtermination date, their duration wouldbeexpectedto bequiteshort. Table 2.8 presents the data on maturity. The data have not been val-idated, so medians seem more reliable than averages. The median of onemonth for overdrafts confirms that their duration isshort. Since over-drafts areshort-term liabilities, theyareoverwhelmingly denominated inpesos.As thematurity lengthens, debt tendsto bedenominatedindollars.This is most clearlythe casefor the debts with longest maturity, housemortgages.

Credit card lines aresimilar tooverdraftsinseveral aspects. Creditcards aresubjecttoboth pre-established ratesandcredit limits character-istic ofloan commitment contracts. However, this approachwasrejectedbecause they are not completely homogeneous lines. According to table2.5,theaverage sizeofoperationswithcredit cardsissubstantially smallerthan thatofoverdrafts,andtheiruse by firms ismuch less widespread.


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38 STREBAND OTHERS

Table2 .8. Maturity b yLoan Type Months)

Typeof loanOverdraftsDiscounted b ills - gu arantee ABillsand promissory notesHouse mortgagesOther mortgagesCar loansOtherpledgesPersonalCreditcardInterfinancialTo gu aranteed publicbankOther loansOther financialLeasesMiscellaneousSmall personal

Average4

117

131422012

512

3179

12727

Median111

9310161011

28111

216

Minimum0000000000900002

Maximum5901197708339632374502005906482

925999139455

15

Numberofcases23,720

2119,517

1034,589

6605,2791,1983,283

2167

9,7127,3271,323

595

Note: Values are for the complete sample of 16,095 f irms.Source: Central de Deudores, Banco Central de la R epublica Argentina.

Accessto A dditional CreditTwopossible alternativesasmeasuresofcredit constraintsare overdraftsover total bank credit and the percentageofauthorizedoverdrafts effec-tivelydrawnon.With respectto the firstalternative,theconjecturewasthatoverdrafts, beingthemost expensive, wouldbe the last typeofloana firmwould resortto in the financialsystem. M oreover, their costat them arginresembles the trade credit paid late variable in Petersen and Rajan (1994),which amountsto arateof 3percentam onth.Iftrade credit paid late indi-cated thatthe firmfacedcredit constraints, itinitially seemed possible thatahigh percentageofoverdraftsin relation tototal bank loans would indi-cate the same problem. As table 2.9 shows, however, the findings do notsupport this conjecture.Althoughthe percentage of c redit drawn through overdrafts is roughlyconstant across categories, the percentage of firms that actuallyuseover-draftstends tofallas the c redit situation deteriorates. This seems to indicate


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BANK RELATIONSHIPSAND FIRMSINARGENTINA 39

Table2.9. Overdrafts Draw n b y CreditSituationMediancreditsituation31.01.52.02 .53.03 .54.04.55.05.56.0

Total cases11,788

306581214497149909220

1,3523247

Firmsusingoverdrafts(percent)

71.567.651.658.946.357.063.548.631.428.129.8

Overdrafts/bank loans 3(percent)

31.721.528.124.829.525.333.037.033.023.535.3

a This is the median of a firms credit situation in banks. It ranges from 1 (the best credit standing) to 5(theworst); 6 is a technical category for delinquent loans with failed banks.b This refers only to firms actually using overdrafts.Note: Values are for the completesample of 16,095 firms.Source: Central de Deudores, Banco Central de la R epublica Argentina.

thatfirms are cut offfrom overdrafts when theyrun intofinancialtrou-ble. Unliketrade credit,thesupplyofwhich mightbefairlyelastic,over-drafts arepartofloancommitmentcontractsthataresubject to a priorapproval process.Thisillustrates why the use ofoverdraftsis an ambigu-ous indicator of credit rationing. Even if it is themostexpensive source ofcredit in the financial system, the firms in the worst shape have less accessto it. In this sense, using overdrafts poses problems similar to using lever-ageindicators.

Thesecond alternative measureofcredit constraints,thepercentageofauthorized overdraftseffectivelydrawnon,takes into account that overdraftsarealine-of-creditcontract subjecttopredefined quotas.Theconjectureinthis instancewasthattheamountofunused overdrafts could provide valu-ableinformationtoidentifyfirmsthat werenotcredit-constrained. Firmsingood condition would tend to useoverdrafts infrequently, while troubledfirms would tend to exhaust their available credit. Since overdraftsarelimited and could be expected to be the credit source of last resort, oncethat limit is reached it would be expected that the f irmwould be credit-constrained in the financial system.


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40 STREBAND OTHERS

Bothofthese measurements dependoninformationforwhich recordsmay not bereadily available.Incontrasttothese limited sourcesofinforma-tion,banks provide detailed information to thecentral bankon allunusedcredit lines thatarecontained inloan commitment contracts. Consequently,bearinginmind PetersenandR ajan's(1994) use oftrade credit discountsasa shadow indicator of credit availability across banks, a similar measurebased onunused credit lineswasdevelopedforthis study. This perspectivealso relatesto theviewinMelnikandPlaut (1986)that credit constraintsarerelated to expostuse ofcredit inexcessof the amounts agreedon in loancommitment contracts.

TheBCRArequires bankstoprovision unused credit linesforcreditriskunlessthecredit lineisrevocableat anytime,so the figuresofunusedcredit lines basically reflect loans backed by loan commitment contractsthathave been grantedbut notdrawn. Table2.10showsthebehaviorof un-used overdraftsandtotal unused credit lines, including unused overdrafts.

Forexample, 53 percent of firms with a median credit standing of 1haveunused credit lines. Thus, alarge percentageof firmswith thebestcredit records have unused credit lines, representingalarge shareoftheir

Table2.10. Unused Overdrafts and Credit L i n e s b y CreditS ituationMediancreditsituation31.01.52.02 .53.03.54.04.55.05.56.0

UnusedoverdraftsTotalcases11,788

306581214497149909220

1,3523247

Percentageof firms

37.223.515.89.39.76.72 .91.80.70.04.3

Percentageof liabilities13

10.86.27.1

11.88.2

14.713.217.310.90.2

24.4

Unusedcredit linesPercentage

offirms52.633.022.216.418.110.710.1

7. 34.06.36.4

Percentageofliabilities

21.311.29.8

13.115.310.38.3

11.49.30.2

25.3a This is the median of a firms credit situation in banks. It ranges from 1 (thebest credit standing) to 5(the worst);6 is a technical category for delinquent loans with failed banks.b Refers only to firms that actually have unused overdrafts.c Refers only to f irms that actually have unused credit lines.Source: Central de Deudores, Banco Central de la Republica Argentina.


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BANK RELATIONSHIPSAND FIRMSIN ARGENTINA 41

bank liabilities. Unusedoverdrafts follow approximatelythesame pattern,but theyareless representativeofavailable sourceso ffunds inbanks.Forthat reason,we useunused credit linesas apercentageo fliabilities withinthe financialsystemas the finalmeasureofcredit availability.BankRelationshipsArgentinahas anunderdeveloped capital market.Few firms arequoted onthestock exchange, thereis anegligibledomesticcorporatebond market,andmostfirmsbasically havetorelyonbank debt.Thecountry resembleswhat Mayer (1994) calls abanking economy, with asmall proportion ofquoted companies,ahigh concentration ofownership,and long-termre-lations between banks and industry, asopposed to a market economywheretheopposite would hold. Thisfactmakesthe impactofbankingre-lationships particularly relevant.More generally, banking relationships areimportant for small andmedium enterprises (SMEs) because they are typically the firms that aremost likelytoresorttobank credit. Mosto f theArgentinefirms in thedatasetare SMEs.Despite this high lending activity,SMEshave aptly been de-scribedasinformationopaquefirmsbecause theyprovidelimitedpublicin-formation (Berger,Klapper,andUdell 2000). Althoughtheprivate informa-tion generatedin relationshi

credit constraints in latin america

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