Investment Decisions and the Soft Budget Constraint: Evidence from Hungarian Manufacturing Firms

This paper investigates the investment behaviour of a large panel of Hungarian firms during the transition period (1989-1999). We examine the role of financial factors and assess whether financial reforms have succeeded in increasing the efficiency of credit allocation. We find that reforms have hardened budget constraints of small private firms, and reduced informational problems for foreign firms. Small stateowned firms became more sensitive to financial conditions, whereas large state-owned firms were largely unaffected and kept operating under a soft budget constraint.