Financial liberalization, credit constraints, and collateral: investment in the Mexican manufacturing sector

We examine the impact of financial liberalization on fixed investment in Me xico using establishment-level data from the manufacturing sector. In addit ion to analyzing changes in cash-flow sensitivities, an innovative approach explores the role of real estate as collateral and addresses a potential c ensoring problem. The results suggest that financial constraints were eased for the smallest firms, but not for larger ones. However, the importance o f possessing real estate increased, given banks' reliance on collateral in their lending. The results also provide microeconomic evidence consistent w ith the role attributed to "financial accelerator" mechanisms during lendin g booms and during post-crisis recessions. (C) 2002 Elsevier Science B.V. A ll rights reserved.