Large firms and soft budget constraints for transition economies

Abstract

Whilst the adverse effect of soft budget constraints (SBCs) is politically and theoretically recognised in transition economies, there is a lack of empirical investigation of SBCs to determine the extent of the bearing on the economy. This article empirically examines the impact of SBCs on investment for large firms in six new European Union (EU) member states. The conventional investment model is challenged by augmenting the model with the variable of ‘bank loans’ as a proxy to capture the impact of SBCs. The panel estimation reveals that there is a clear indication of SBCs for the Czech Republic and Poland, whereas for Hungary and the Baltic countries, the operation of SBCs seems to be weak. It is also found that such factors as joining the EU and financial development mitigate the practice of SBCs.