Financial constraint, firms' investments and the channels of monetary policy in Indonesia

Using Tobin's q and Euler equations estimated by a novel technique of Blundell and Bond's system GMM, this paper investigates the role of financial factors (cash flow and leverage) in investment spending of Indonesian listed companies during 1993-1997. Overall, the results suggest the existence of financial constraints and agency costs for Indonesian firms in raising external funds. However, agency costs vary across firms according to whether the firms are members of large business groups owning foreign exchange banks and their financial conditions (leverage and pay-out ratio). These results provide indirect support to the existence of the credit channel of monetary policy which recently becomes a hot debate in the aftermath of the recent Asian financial crisis.