Liquidity constraints and investment in transition economies - The case ofBulgaria

We use Bulgarian firm-level data to investigate the impact of liquidity con straints on investment performance. Internal funds are an important determi nant of investment in most industrialized countries. We test whether intern al funds are important for firm investment during the current transition pr ocess in Bulgaria. We use a simple accelerator model of investment to test whether Liquidity constraints are relevant in the case of Bulgaria. Our est imations are based on data for the period 1993-95, prior to the Bulgarian f inancial crisis in 1996-97. It turns out that Bulgarian firms are liquidity constrained, and that firms' size and financial structure help to distingu ish between firms that are more and less liquidity constrained. Ln our view , liquidity constraints can be given a different interpretation in the case of transition economies as compared to Western economies. A more in depth analysis of the data reveals that liquidity constraints, and consequently t he access to external funds for Bulgarian firm investment, are to be seen a gainst the background of soft-budget constraints and the failure of the fin ancial system to enforce an efficient allocation of funds. Ln our view, the lack of liquidity constraints may actually be seen as a sign of financial weakness in the case of Bulgaria. JEL classification: D24, P31, P34.