Liquidity Constraints and Investment in Transition Economies : The Case of Bulgaria

The authors use firm level data on Bulgaria to investigate the impact of liquidity constraints on firms investment performance. Internal funds are a important determinant of investment in most industrial economies. The authors use a simple accelerator model of investment to test whether liquidity constraints are relevant in Bulgaria's case. Their estimates are based on data for 1993-95, before Bulgaria's financial crisis of 1996-97. It turns out that Bulgarian firms are liquidity-constrained and that firms size and financial structure help to distinguish between firms that are more and less liquidity-constrained. In the authors' view, liquidity constraints in transition economies should be interpreted in different ways than those in industrial economies. In Bulgaria, liquidity constraints, and hence access to external funds should be seen in the context of soft budget constraints and the financial systems failure to enforce the efficient allocation of funds. The relationship between liquidity constraints and firm characteristics may actually be the opposite of what is normally the case in industrial countries. In Bulgaria, lack of liquidity constraints may be a sign of financial weakness