Academic Proceeding

This paper is aimed to examine the impact of bail-out policy carried out following the financial crisis which hit the Malaysian economy some years ago. Using panel estimation methods, this study tries to analyze the relationship between firms‟ investments and their cash flows before and after the crisis period. Theoretically, the relationship becomes tight due to the crisis. This tight relationship indicates the existence of severe financial constraints faced by existing firms. Such relationship is on the contrast to the loose relationship prior the crisis when the financial market was liberalized through various deregulations including the interest rates deregulation. However, to combat the crisis Malaysia carried out a variety of counter-crisis measures. The measures are packaged under the bail-out policy implementation. If the bail-out policy was a success, it can be measured through the easiness of financial constraints the firms faced. Using annual financial data of unbalanced panel of 1988-2005, the results found are in favor of the bail-out policy.