Determinants and consequences of soft budget constraints. An empirical analysis using enterprise-level data in transition countries

This paper presents empirical work grounded in the soft budget-constraint literature. A loan is soft when a bank cannot commit the enterprise to hold to a fixed initial budget and/or the timing of repayment. Using data collected by the EBRD (BEEPS 2002) in 26 transition economies, we analyze the determinants of managers' expectations of having a soft loan. In particular, we find that managers' expectations are lower when the initial financing requires collateral, and higher for larger firms and when firms had recently experienced financial distress. We also provide evidence that managers' expectations influence their price responsiveness.