Deterioration of Firm Balance Sheet and Investment Behavior: Evidence from Panel Data on Thai Firms*

Using firm‐level data, the present paper investigates whether, and to what extent, firm balance sheet problems mattered for investment over the period 1992–2002. Various categories of firms are compared, with firms grouped according to their a priori degree of liquidity constraint. Firms are also divided into pre‐crisis and post‐crisis periods to examine the impact of the financial crisis on firms’ investments. The results support the existence of the balance sheet channel and suggest that Thai firms faced greater liquidity constraints following the financial crisis. Small firms and non‐bond‐issuing firms are found to have been more adversely affected by the crisis than large firms and bond‐issuing firms.