Interest burden and external finance choices in emerging markets: Firm-level data evidence from Malaysia

This paper provides empirical evidence on the credit channel of the monetary transmission mechanism within the framework of external finance choices using a firm-level panel data. We estimate the corporate finance behaviour in Malaysia, a country with relatively developed capital market, but significant involvement of banking sector in financing the economy using a panel dataset of over 900 listed firms in Malaysia for the period 1990–2010. The analysis suggests the following insights: firm-specific characteristics are important factor in explaining the corporate financing choices of firms; different monetary conditions affect the rate of interest charged by lenders to firms, with financially constrained firms paying a higher premium; and financially constrained firms have limited access to external finance and are severely affected during times of increasing interest rates. Overall, our results are consistent with the existence of credit channel and support the unequal propagation of monetary policy among firms in different monetary conditions.