Financial Development and Financing Constraints: International Evidence from the Structural Investment Model
Abstract
This article provides evidence that financial development impacts growth by reducing financing constraints that would otherwise distort efficient allocation of investment. The financing constraints are inferred from the investment Euler equation by assuming that the firm's stochastic discount factor is a function of the firm's financial position (specifically, the stock of liquid assets). The magnitude of the changes in the cost of capital is twice as large in a country with a low level of financial development as in a country with an average level of financial development. The size effect, business cycles, and legal environment effects are also considered. Copyright 2003, Oxford University Press.Download Info
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic Info
Article provided by Society for Financial Studies in its journal The Review of Financial Studies.
Volume (Year): 16 (2003)
Issue (Month): 3 (July)
Pages: 765-791
Contact details of provider:
Postal: Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.
Fax: 919-677-1714
Email:
Web page: http://www.rfs.oupjournals.org/
More information through EDIRC
Order Information:
Web: http://www4.oup.co.uk/revfin/subinfo/
Related research
Keywords:Other versions of this item:
- Love, Inessa, 2001. "Financial development and financing constraints - international evidence from the structural investment model," Policy Research Working Paper Series 2694, The World Bank.
References
References listed on IDEASPlease report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hubbard, R Glenn & Kashyap, Anil K, 1992.
"Internal Net Worth and the Investment Process: An Application to U.S. Agriculture,"
Journal of Political Economy,
University of Chicago Press, vol. 100(3), pages 506-34, June.
- R. Glenn Hubbard & Anil K. Kashyap, 1991. "Internal net worth and the investment process: an application to U.S. agriculture," Working Paper Series, Macroeconomic Issues 91-27, Federal Reserve Bank of Chicago.
- R. Glenn Hubbard & Anil Kashyap, 1990. "Internal Net Worth and the Investment Process: An Application to U.S. Agriculture," NBER Working Papers 3339, National Bureau of Economic Research, Inc.
- R. Glenn Hubbard & Anil Kashyap, 1990. "Internal net worth and the investment process: an application to U.S. agriculture," Finance and Economics Discussion Series 124, Board of Governors of the Federal Reserve System (U.S.).
- Charles W. Calomiris & Charles P. Himmelberg & Paul Wachtel, 1994.
"Commercial Paper, Corporate Finance, and the Business Cycle: A Microeconomic Perspective,"
NBER Working Papers
4848, National Bureau of Economic Research, Inc.
- Calomiris, Charles W. & Himmelberg, Charles P. & Wachtel, Paul, 1995. "Commercial paper, corporate finance, and the business cycle: a microeconomic perspective," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 42(1), pages 203-250, June.
- Charles W. Calomiris & Charles P. Himmelberg & Paul Wachtel, 1994. "Commercial Paper, Corporate Finance and the Business Cycle: A Microeconomic Perspective," Working Papers 94-17, New York University, Leonard N. Stern School of Business, Department of Economics.
- Joe Peek & Eric S. Rosengren, 1995.
"Is bank lending important for the transmission of monetary policy: an overview,"
Conference Series ; [Proceedings],
Federal Reserve Bank of Boston, pages 1-14.
- Joe Peek & Eric S. Rosengren, 1995. "Is bank lending important for the transmission of monetary policy? An overview," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 3-11.
- Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
- Wurgler, Jeffrey, 2000.
"Financial markets and the allocation of capital,"
Journal of Financial Economics,
Elsevier, vol. 58(1-2), pages 187-214.
- Jeffrey Wurgler, 1999. "Financial Markets And The Allocation Of Capital," Yale School of Management Working Papers ysm123, Yale School of Management, revised 01 Mar 2001.
- Arellano, Manuel & Bover, Olympia, 1995.
"Another look at the instrumental variable estimation of error-components models,"
Journal of Econometrics,
Elsevier, vol. 68(1), pages 29-51, July.
- M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
- Mark Gertler & Simon Gilchrist, 1991.
"Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms,"
NBER Working Papers
3892, National Bureau of Economic Research, Inc.
- Gertler, Mark & Gilchrist, Simon, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 309-40, May.
- Gertler, M. & Gilchrist, S., 1992. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 92-08, C.V. Starr Center for Applied Economics, New York University.
- Gertler, M. & Gilchrist, S., 1993. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 93-02, C.V. Starr Center for Applied Economics, New York University.
- Mark Gertler & Simon Gilchrist, 1993. "Monetary policy, business cycles and the behavior of small manufacturing firms," Finance and Economics Discussion Series 93-4, Board of Governors of the Federal Reserve System (U.S.).
- Toni M. Whited, 1990.
"Debt, liquidity constraints, and corporate investment: evidence from panel data,"
Finance and Economics Discussion Series
114, Board of Governors of the Federal Reserve System (U.S.).
- Whited, Toni M, 1992. " Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data," Journal of Finance, American Finance Association, vol. 47(4), pages 1425-60, September.
- Luigi Zingales, 2000.
"In Search of New Foundations,"
NBER Working Papers
7706, National Bureau of Economic Research, Inc.
- Luigi Zingales, 2000. "In Search of New Foundations," Journal of Finance, American Finance Association, vol. 55(4), pages 1623-1653, 08.
- Zingales, Luigi, 2000. "In Search of New Foundations," CEPR Discussion Papers 2551, C.E.P.R. Discussion Papers.
- Luigi Zingales, 2000. "In Search of New Foundations," CRSP working papers 515, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Fabio Schiantarelli, 1995.
"Financial constraints and investment: a critical review of methodological issues and international evidence,"
Conference Series ; [Proceedings],
Federal Reserve Bank of Boston, pages 177-226.
- Fabio Schiantarelli, 1995. "Financial Constraints and Investment: A Critical Review of Methodological Issues and International Evidence," Boston College Working Papers in Economics 293., Boston College Department of Economics.
- Ross Levine & Norman Loayza & Thorsten Beck, 2002.
"Financial Intermediation and Growth: Causality and Causes,"
Central Banking, Analysis, and Economic Policies Book Series,
in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084
Central Bank of Chile.
- Levine, Ross & Loayza, Norman & Beck, Thorsten, 2000. "Financial intermediation and growth: Causality and causes," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 31-77, August.
- Beck, T.H.L. & Levine, R. & Loayza, N., 2000. "Financial intermediation and growth: Causality and causes," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125519, Tilburg University.
- Thorsten Beck & Ross Levine & Norman Loayza, 1999. "Financial Intermediation and Growth: Causality and Causes," Working Papers Central Bank of Chile 56, Central Bank of Chile.
- Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series 2059, The World Bank.
- Ross Levine & Sara Zervos, .
"Stock markets, banks and economic growth ,"
CERF Discussion Paper Series
95-11, Economics and Finance Section, School of Social Sciences, Brunel University.
- Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-58, June.
- Levine, Ross & Zervos, Sara, 1996. "Stock markets, banks, and economic growth," Policy Research Working Paper Series 1690, The World Bank.
- King, Robert G. & Levine, Ross, 1993.
"Finance and growth : Schumpeter might be right,"
Policy Research Working Paper Series
1083, The World Bank.
- King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
- Harris, John R & Schiantarelli, Fabio & Siregar, Miranda G, 1994. "The Effect of Financial Liberalization on the Capital Structure and Investment Decisions of Indonesian Manufacturing Establishments," World Bank Economic Review, World Bank Group, vol. 8(1), pages 17-47, January.
- Kumar, Krishna B & Rajan, Raghuram G & Zingales, Luigi, 1999.
"What Determines Firm Size?,"
CEPR Discussion Papers
2211, C.E.P.R. Discussion Papers.
- Krishna B. Kumar & Raghuram G. Rajan & Luigi Zingales, 1999. "What Determines Firm Size?," NBER Working Papers 7208, National Bureau of Economic Research, Inc.
- Krishna B. Kumar & Raghuram G. Rajan & Luigi Zingales, . "What Determines Firm Size?," CRSP working papers 496, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Gertler, M.L. & Hubbard, R.G., 1988.
"Financial Factors In Business Fluctuations,"
Papers
fb-_88-37, Columbia - Graduate School of Business.
- Mark Gertler & R. Glenn Hubbard, 1988. "Financial factors in business fluctuations," Proceedings, Federal Reserve Bank of Kansas City, pages 33-78.
- Mark L. Gertler & R. Glenn Hubbard, 1989. "Financial Factors in Business Fluctuations," NBER Working Papers 2758, National Bureau of Economic Research, Inc.
- Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988.
"Financing Constraints and Corporate Investment,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
- Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
- Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997.
"Legal Determinants of External Finance,"
Harvard Institute of Economic Research Working Papers
1788, Harvard - Institute of Economic Research.
- La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
- RAFAEL LaPORTA & FLORENCIO LOPEZ-de-SILANES & ANDREI SHLEIFER & ROBERT W. VISHNY, . "Legal Determinants of External Finance,"," CRSP working papers 324, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," NBER Working Papers 5879, National Bureau of Economic Research, Inc.
- R. Glenn Hubbard, 1997.
"Capital-Market Imperfections and Investment,"
NBER Working Papers
5996, National Bureau of Economic Research, Inc.
- R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
- Haramillo, Fidel & Schiantarelli, Fabio & Weiss, Andrew, 1996.
"Capital market imperfections before and after financial liberalization: An Euler equation approach to panel data for Ecuadorian firms,"
Journal of Development Economics,
Elsevier, vol. 51(2), pages 367-386, December.
- Jaramillo, Fidel & Schiantarelli, Fabio & Weiss, Andrew, 1993. "Capital market imperfections before and after financial liberalization : a Euler Equation approach to panel data for Ecuadorian firms," Policy Research Working Paper Series 1091, The World Bank.
- Fabio Schiantarelli & Andrew Weiss & Fidel Jaramillo, 1993. "Capital Market Imperfections Before And After Financial Liberization: An Euler Equation Approach To Panel Data For Ecuadorian Firms," Boston College Working Papers in Economics 221, Boston College Department of Economics.
- Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2001.
"Emerging equity markets and economic development,"
Journal of Development Economics,
Elsevier, vol. 66(2), pages 465-504, December.
- Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2000. "Emerging Equity Markets and Economic Development," NBER Working Papers 7763, National Bureau of Economic Research, Inc.
- Simon Gilchrist & Charles Himmelberg, 1999.
"Investment: Fundamentals and Finance,"
NBER Chapters,
in: NBER Macroeconomics Annual 1998, volume 13, pages 223-274
National Bureau of Economic Research, Inc.
- Simon Gilchrist & Charles Himmelberg, 1998. "Investment, Fundamentals and Finance," NBER Working Papers 6652, National Bureau of Economic Research, Inc.
- Rajan, Raghuram G & Zingales, Luigi, 1998.
"Financial Dependence and Growth,"
American Economic Review,
American Economic Association, vol. 88(3), pages 559-86, June.
- Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Raghuram G. Rajan & Luigi Zingales, 1996. "Financial Dependence and Growth," NBER Working Papers 5758, National Bureau of Economic Research, Inc.
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
- Anil K. Kashyap & Owen A. Lamont & Jeremy C. Stein, 1993.
"Credit conditions and the cyclical behavior of inventories,"
Working Paper Series, Macroeconomic Issues
93-7, Federal Reserve Bank of Chicago.
- Kashyap, Anil K & Lamont, Owen A & Stein, Jeremy C, 1994. "Credit Conditions and the Cyclical Behavior of Inventories," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 565-92, August.
- Stephen Bond & Julie Elston & Jacques Mairesse & Benoit Mulkay, 1997.
"Financial Factors and Investment in Belgium, France, Germany and the UK:A Comparison Using Company Panel Data,"
NBER Working Papers
5900, National Bureau of Economic Research, Inc.
- Stephen Bond & Julie Ann Elston & Jacques Mairesse & Benoît Mulkay, 1999. "Financial Factors and Investment in Belgium, France, Germany and the UK : A Comparison using Company Panel Data," Working Papers 99-64, Centre de Recherche en Economie et Statistique.
- Steve Bond & Julie Elston & Jacques Mairesse & Benoit Mulkay, 1997. "Financial factors and investment in Belgium, France, German and the UK: A comparison using company panel data," IFS Working Papers W97/08, Institute for Fiscal Studies.
- Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999.
"The determinants and implications of corporate cash holdings,"
Journal of Financial Economics,
Elsevier, vol. 52(1), pages 3-46, April.
- Tim Opler & Lee Pinkowitz & Rene Stulz & Rohan Williamson, 1997. "The Determinants and Implications of Corporate Cash Holdings," NBER Working Papers 6234, National Bureau of Economic Research, Inc.
- Klaus Neusser & Maurice Kugler, 1998. "Manufacturing Growth And Financial Development: Evidence From Oecd Countries," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 638-646, November.
- King, Robert G. & Levine, Ross, 1993.
"Finance and growth : Schumpeter might be right,"
Policy Research Working Paper Series
1083, The World Bank.
- King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
- Gaston Gelos & Alejandro M. Werner, 1999.
"Financial Liberalization, Credit Constraints, and Collateral - Investment in the Mexican Manufacturing Sector,"
IMF Working Papers
99/25, International Monetary Fund.
- Gelos, R. Gaston & Werner, Alejandro M., 2002. "Financial liberalization, credit constraints, and collateral: investment in the Mexican manufacturing sector," Journal of Development Economics, Elsevier, vol. 67(1), pages 1-27, February.
- Demirguc-Kunt, Asli & Levine, Ross, 1995.
"Stock market development and financial intermediaries : stylized facts,"
Policy Research Working Paper Series
1462, The World Bank.
- Demirguc-Kunt, Ash & Levine, Ross, 1996. "Stock Market Development and Financial Intermediaries: Stylized Facts," World Bank Economic Review, World Bank Group, vol. 10(2), pages 291-321, May.
- Beck, Thorsten & Levine, Ross, 2000. "New firm formation and industry growth - does having a market- or bank-based system matter?," Policy Research Working Paper Series 2383, The World Bank.
- René M. Stulz, 2000. "Financial Structure, Corporate Finance and Economic Growth," International Review of Finance, International Review of Finance Ltd., vol. 1(1), pages 11-38.
- Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
- Levine, Ross, 1999. "Law, Finance, and Economic Growth," Journal of Financial Intermediation, Elsevier, vol. 8(1-2), pages 8-35, January.
- Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 335-359, September.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- R. Glenn Hubbard & Anil K Kashyap & Toni M. Whited, 1995. "Internal Finance and Firm Investment," NBER Working Papers 4392, National Bureau of Economic Research, Inc.
- Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
- Rousseau, Peter L & Wachtel, Paul, 1998. "Financial Intermediation and Economic Performance: Historical Evidence from Five Industrialized Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 657-78, November.
- Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.
Lists
This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.Statistics
Access and download statisticsCorrections
When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:16:y:2003:i:3:p:765-791For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Oxford University Press) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.

