Financial Convergence in Transition Economies: EU Enlargement

This paper analyzes the financial effect of the enlargement of the European Union (EU) to include ten new Central and East European countries (CEECs) on firms' business and financial structures. We employ quantitative analytic techniques and financial ratios to discover whether firms in the new EU member states tend to converge with businesses in the EU-15 in terms of the structure of their financial statements. We examine the extent to which the increasing integration of the former may foster the convergence of productive structures. We analyze the evolution of twelve financial ratios in a sample of firms obtained from the AMADEUS database, performing a dynamic factor analysis that identifies the determining factors of the joint evolution of deviations in financial ratios from the average values of EU-15 firms. This allows us to analyze the convergence in each of the CEECs toward the EU-15.Bayesian inference, dynamic factor analysis, EU enlargement, financial convergence, financial ratios, financial structure,