Do external funds yield lower returns? Recent evidence from East Asian economies

Nigel Driffield, Sarmistha Pal*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


One of the central explanations of the recent Asian Crisis has been the problem of moral hazard as the source of over-investment and excessive external borrowing. There is however rather limited firm-level empirical evidence to characterise inefficient use of internal and external finances. Using a large firm-level panel data-set from four badly affected Asian countries, this paper compares the rates of return to various internal and external funds among firms with low and high debt financing (relative to equity) among financially constrained and other firms. Selectivity-corrected estimates obtained from random effects panel data model do suggest evidence of significantly lower rates of return to long-term debt, even among firms relying more on debt relative to equity in our sample. There is also evidence that average effective interest rates often significantly exceeded the average returns to long-term debt in the sample countries in the pre-crisis period. © 2006 Elsevier Inc. All rights reserved.

Original languageEnglish
Pages (from-to)171-188
Number of pages18
JournalJournal of Asian Economics
Issue number1
Publication statusPublished - Feb 2006

Bibliographical note

NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Asian economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Driffield, N & Pal, S, 'Do external funds yield lower returns? Recent evidence from East Asian economies' Journal of Asian economics, vol 17, no. 1 (2006) DOI 10.1016/j.asieco.2006.01.011


  • Asian crisis
  • efficiency of internal and external funds
  • financial constraint
  • moral hazard of bad loans
  • random effects model with selection


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