Abstract:

TCorporate finance in the Central and Eastern Europe was, in general, characterised by soft budget constraints (SBCs), often leading to the inefficient allocation of resources. This paper empirically investigates the extent of the impact of SBCs on investment financing for large firms in six new EU member states. We find that firms in the Czech Republic and Poland show some signs of persistent operation of SBCs with less credit constraints, suggesting that SBCs are an important determinant of investment. The empirical results also reveal that joining the EU and financial deepening are likely to reduce the prevalence of SBCs.