The purpose of the study is to explore the evolution of financing available to Ukrainian firms in the period 2010 to 2016. The authors investigate whether the institutional environment influences financing in Ukraine, examining in particular the financial system‘s level of development. The starting point is the notion that in countries with a weak financial system, firms obtain less external financing and this in turn decreases their opportunities for growth. The authors argue that understanding how exactly financing of firms depends on the institutional environment is important in defining efficient government policies.

According to this paper, Ukraine is a country with a poorly developed financial system. Financial institutions (financial intermediaries and financial markets) do not play the same role as in developed countries with efficient financial systems. After a slight recovery in 2014, the level of development of Ukraine's financial system rapidly declined in 2015 and 2016. In addition, there were significant transformational changes in the financial system of Ukraine. For example, (1) massive bankruptcy of Ukrainian commercial banks, (2) rapid reduction of Ukrainian issuers of securities and shortening of trading volumes on the domestic stock market, (3) a significant decrease in bank branch offices throughout the country and (4) a rapid decrease in stock market capitalization.

The authors use time series analysis, correlation and regression analysis to assess the impact of financial system development on a firm’s financing in Ukraine. They demonstrate how the military conflict in Ukraine, the devaluation of the national currency and the loss of Russian markets since 2014 negatively influenced the development of the banking sector and financial markets. Their results reveal that financing patterns of firms in Ukraine do not show a strong statistical dependence on the development of the financial system. Financing for Ukrainian firms is not provided by the formal financial system but by sources of informal financing. This result supports previous studies, showing that informal finance is more significant in countries with poorly functioning financial systems or weak property rights protection.

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