Capital market imperfections before and after financial liberalization: An Euler equation approach to panel data for Ecuadorian firms

Using a large panel of Ecuadorian firms, this paper analyzes the role of capital market imperfections for investment decisions, and investigates whether the financial reforms introduced in the 80s have succeeded in relaxing financial constraints. The model allows both for an increasing cost of borrowing, as the degree of leverage increases, and for a ceiling on the latter, The empirical results support the existence of significant capital market imperfections for small and young firms, but not for large and old firms. Moreover, the estimated equations do not provide evidence that financial reform in Ecuador has helped to relax financial constraints for small firms.