Skip Navigation

This Article
Right arrow Full Text (PDF)
Right arrow Alert me when this article is cited
Right arrow Alert me if a correction is posted
Services
Right arrow Email this article to a friend
Right arrow Similar articles in this journal
Right arrow Alert me to new issues of the journal
Right arrow Add to My Personal Archive
Right arrow Download to citation manager
Right arrowRequest Permissions
Google Scholar
Right arrow Articles by HOLMSTRÖM, B.
Right arrow Search for Related Content
Related Collections
Right arrow O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
Right arrow P33 - International Trade, Finance, Investment, and Aid
Right arrow P34 - Financial Economics
Social Bookmarking
Add to CiteULike   Add to Connotea   Add to Del.icio.us  
What's this?

© 1996 Oxford University Press

research-article

Financing of Investment in Eastern Europe: A Theoretical Perspective

BENGT HOLMSTRÖM

Massachusetts Institute of Technology, Department of Economics and Sloan School of Management, and Institute for Policy Reform USA

Abstract

Eastern Europe suffers from a worsening capital shortage problem. This paper studies ways to find the needed funds. It is argued that firms need funds in order to transform illiquid ideas into liquid claims, possibly through a chain of intermediaries. It shows that collateral (proven assets) plays the central role in increasing liquidity of liabilities and determining the firm's capacity to fund investments. A model is offered to illustrate how firm growth is limited by the net worth of its marketable assets. The analysis is extended to specialized assets for which the liquidation value is less than the ongoing value. The important second variation of intermediation is also examined. A key feature of the intermediation model is that intermediaries themselves are constrained by their net worth. Some lessons are then drawn regarding the status and future of financing in Eastern Europe. The intermediation model suggests that granted the scarcity of capital, financing of investments will have to be more information-intensive: intermediaries will have to take a more active role in monitoring firms. Capital formation is likely to be a slow process, since the capital base is so small. Private investments will be geared towards smaller, safer and shorter-term projects. The logic of liquidity-constrained growth argues for letting small firms carry the brunt of the responsibility for future prosperity in Eastern Europe.


Add to CiteULike CiteULike   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us    What's this?


This article has been cited by other articles:


Home page
 Ind Corp ChangeHome page
L. Dibiaggio
Design complexity, vertical disintegration and knowledge organization in the semiconductor industry
Ind. Corp. Change, April 29, 2007; (2007) dtm006v1.
[Abstract] [Full Text] [PDF]

Home page
 REV FINANC STUDHome page
S. Baliga and B. Polak
The Emergence and Persistence of the Anglo-Saxon and German Financial Systems
Rev. Financ. Stud., January 1, 2004; 17(1): 129 - 163.
[Abstract] [Full Text] [PDF]


Disclaimer: Please note that abstracts for content published before 1996 were created through digital scanning and may therefore not exactly replicate the text of the original print issues. All efforts have been made to ensure accuracy, but the Publisher will not be held responsible for any remaining inaccuracies. If you require any further clarification, please contact our Customer Services Department.