The External Finance Premium in Brazil: Empirical Analyses Using State Space Models

Abstract

Our objective in this paper is to estimate the external finance premium (EFP), which is a non-observable variable, of Brazilian firms using state space models. For this purpose, we built an original database with confidential and public data containing balance sheet information of 5,026 public and private firms from the third quarter of 1994 to the fourth quarter of 2010. Our results show that the EFP average and volatility of financially constrained firms are higher than those of non-financially constrained firms and that EFP is more sensitive to monetary policy for financially constrained firms than for nonfinancially constrained ones. This body of empirical evidence points to the importance of the balance sheet channel of the monetary transmission mechanism in Brazil.