doiSerbia

Which institutions are important for firms performance? Evidence from Bayesian model averaging analysis

Fidrmuc Jarko (Henan University in Kaifeng, China + Zeppelin University in Friedrichshafen, Germany + IES Charles University in Prague, Czech Republic + Kaunas University of Technology in Kaunas, Lithuania)
Kapounek Svatopluk (Mendel University in Brno, Czech Republic + Kaunas University of Technology in Kaunas, Lithuania)
Siddiqui Martin (Zeppelin University in Friedrichshafen, Germany)

Using a rich dataset on individual firms in selected EU countries between 2005 and 2012, we document a surprisingly high share of assets tied in highly inefficient firms. Moreover, we discuss different channels through which institutions may affect firm financial developments and thus the long-run growth. Using Bayesian model averaging analysis, we discuss the importance of different types of economic, financial and political institutions. We show that high institutional quality improves the financial conditions of firms. However, too lax business regulations may worsen firms’ performance possibly due to excessive risk taking behavior.

Keywords: institutional quality, insolvency, inefficient firms, Bayesian model averaging