Credit Constraints and Profitability : Evidence from a Transition Economy

A conceptual framework for analyzing credit rationing and the link between credit access and profitability is developed. The empirical analysis using data from manufacturing firms in Bulgaria, an economy with dramatically changing credit constraints during transition, provides direct estimates of credit rationing and its impact on profitability and reform policy outcomes. The results from switching regressions show that the presence of credit market imperfections does impinge on profitability of firms and hinders industry restructuring. Policies fostering sound financial intermediation are suggested and discussed.