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Published by: Darío López Zadicoff on Dec 03, 2010
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Are Public Firms In Argentina Credit Restricted?
Darío López Zadico
July 2010
This paper
nds evidence in favor of rejecting the presence of credit restrictions af-fecting public
rms in Argentina. Focus is on two types of credit restrictions: creditrationing and a cost of debt premium. Their existence is tested through an estimableinvestment Euler equation, built upon the pro
t maximization behavior of 
rms. As-suming rational expectations, the estimation is performed through the GMM, countingon a balanced panel of 40 listed
rms between 1998 and 2007.
JEL classi 
C23; D21; G30
1. Introduction
Are public
rms in Argentina credit restricted? This paper di
ers from pre-vious literature referring to Argentina in the sense it commands a direct test toaccount for credit restrictions. In particular, in a partial equilibrium frameworkand following mainly Schiantarelli et al. (1996), a pro
t maximization model isdeveloped, where credit rationing and a cost of debt premium are factored in.This yields an estimable investment Euler equation and, through evaluating theestimates of its parameters, evidence in favor/against the existence of credit re-strictions is obtained.Credit rationing means demand for credit exceeds supply at the prevailingequilibrium interest rate (and there is no ceiling on credit rates). Stiglitz and Weiss(1981) build a model in which credit rationing is a consequence of asymmetricinformation. Their framework is made up of lenders and
rms, and each of thelatter has an indivisible project to develop. Asymmetric information arises because
This work was improved by comments in the Cuarto Congreso De Estudiantes De PostgradoEn Economía, held at Universidad Nacional Del Sur (Bahía Blanca).
Are Public Firms In Argentina Credit Restricted?
they assume
rms (only) di
er by the risk of their project, which is not observed bylenders (yet, the statistical distribution of the risk of the projects is known). Theyalso rely in three further assumptions: the expected pro
t of a
rm is decreasing inthe interest rate, increasing in the risk of its project (due to contracts are subjectto limited liability, which means pro
t is a convex function of cash
ow), and thereis a reservation level of expected pro
t (such that below it
rms do not demandcredit). This results in a downward sloping demand curve for credit; an increase(fall) in the interest rate decreases (increases) demand for credit, as relatively safe
rms leave (enter) the market. Because of the latter, the equilibrium of the marketcan be o
the demand curve. For example, in a monopolistic context, the lendercan maximize its expected pro
ts by randomly selecting applicants, rather thanincreasing the interest rate so that there is no excess demand. This is because thenegative impact of changing the risk of the population outweighs the direct impactof the interest rate increase.A cost of debt premium means the interest rate lenders charge is increasing inthe applicant’s leverage. This may also arise because of asymmetric information.In particular, Jensen and Meckling (1976) would de
ne the relationship betweenlenders and borrowers as an agency relationship. This is because it involves acontract under which lenders (principals) engage borrowers (agents) to invest themoney they are granted, and some privately observed decision making authoritylies in borrowers. As both parties are pro
t maximizers, there is good reason tobelieve borrowers do not always act in the best interests of the lenders. Whatis more important, the likelihood of the latter to happen is increasing in theborrower’s leverage. There are states in which, if there are two
rms that only di
erin their capital structure, the highly levered one defaults its debt while the lowly
Are Public Firms In Argentina Credit Restricted?
levered does not, given the former discontinues its operations for all the money isfor creditors. Consequently, lenders charge higher interest rates to highly levered
rms, in order to compensate for this agency cost of debt (potential reduction inwelfare experienced by lenders).Section 2 presents a summary of previous relevant literature. Section 3 il-lustrates the pro
t maximization model assumed. Section 4 shows the testableempirical implications (of the model). Section 5 describes the dataset and showsdescriptive statistics. Section 6 presents the estimation strategy. Section 7 depictsthe results. Section 8 concludes.
2. Literature Review
This paper di
ers from previous literature referring to Argentina in the sense itcommands a direct test to account for credit restrictions. Previous work that copeswith credit restrictions in Argentina include Streb et al. (2002) and Fernández etal. (2007). The former argue in favor of the existence of both credit rationing anda cost of debt premium when analyzing overdraft accounts, yet they rely on theassumption
rms with zero unused preset credit lines are
nancially constrained.On the other hand, the latter
nd evidence that supports the absence of creditrationing when analyzing corporate debt, but do not perform a formal empiricaltest.Streb et al. (2002) analyze the determinants of the availability and cost of credit for
rms in Argentina at the margin using cross sectional data on overdraftaccounts. While the analysis of the cost of credit is straightforward (the interestrate
rms pays on their overdraft account is regressed, and they
nd it is positivelyrelated to leverage), the availability of credit is not exclusively approached through

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