Financial Systems and Enterprise Restructuring in Eastern Europe

This article investigates the effects of financial systems on enterprise restructuring in twenty-six transition economies from 1999 to 2005. It identifies various sources of financing and estimates their respective impacts on enterprise restructuring. Loans from local commercial banks are found to be more effective than any other form of financing at promoting restructuring. Their effect increases as the size of the firm decreases. There is some evidence that the effectiveness of equity financing in restructuring increases over time, suggesting that the equity mechanism takes root in transition economies only gradually. It is also found that restructuring contributes to firm performance, suggesting a linkage among financing sources, restructuring, and firm performance.