Firms' Financing Costs: The Role of Development Banks in Mexico

Type:
SCID Working Paper 113

Author(s):

Published:
11/1/01

Region:
Latin America

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Abstract:
This paper deals with Mexican firms’ financing costs of receiving loans from development banks. It also analyzes the firms’ probability of obtaining a development bank loan. Using a dataset of more than 6,300 loans, I study the determinants of the loans’ interest rates. Results indicate that financing costs for firms are 2.2 percentage points higher if the company obtained its peso loan from a development bank, but 0.4 percentage points lower if the loan was denominated in dollars. These findings are robust to different econometric techniques and specifications. On the other hand, probit results indicate no strong evidence that the firms’ probability of receiving loans from development banks is related to its size, or its belonging to economic activities highly identified with development, or its location in low-income Mexican states. Furthermore, there is evidence that the allocation of loans was affected by political patronage. In particular, the estimated probability of a firm receiving a loan increases substantially if the politicians representing the state in which the company is located belong to the ruling party.