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The Role of Long-Term Finance: Theory and Evidence

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Author Info
Caprio, Gerard, Jr
Demirguc-Kunt, Asli

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Abstract

Improving the supply of long-term credit to industrial firms is considered a priority for growth in developing countries. A World Bank multicountry study looks at whether a long-term credit shortage exists and, if so, whether it has had an impact on investment, productivity, and growth. The study finds that even after controlling for the characteristics of individual firms, businesses in developing countries use significantly less long-term debt than their counterparts in industrial countries. Researchers are able to explain the difference in debt composition between industrial and developing countries by firm characteristics; by macroeconomic factors; and, most importantly, by financial development, government subsidies, and legal and institutional factors. The analysis concludes that long-term finance tends to be associated with higher productivity. An active stock market and an ability to enter into long-term contracts also allow firms to grow at faster rates than they could attain by relying on internal sources of funds and short-term credit alone. Importantly, although government-subsidized credit markets have increased the long-term indebtedness of firms, there is no evidence that these subsidies are associated with the ability of firms to grow faster. Indeed, in some cases subsidies are associated with lower productivity.

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Publisher Info
Article provided by Oxford University Press in its journal World Bank Research Observer.

Volume (Year): 13 (1998)
Issue (Month): 2 (August)
Pages: 171-89
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Handle: RePEc:oup:wbrobs:v:13:y:1998:i:2:p:171-89

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References listed on IDEAS
Please 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.:
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Full references

Cited by:
(explanations, Please 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.)

  1. Paul Alagidede & Theodore Panagiotidis, 2009. "Modelling stock returns in Africa’s emerging equity markets," Discussion Paper Series 2009_01, Department of Economics, University of Macedonia, revised Jan 2009. [Downloadable!]
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  2. Ferro, Gustavo, 2000. "¿Vale la pena tener intermediarios financieros propios? Un examen a la literatura reciente
    [Does it worth having local financial intermediaries? An examination onto recent literature]    ," MPRA Paper 15359, University Library of Munich, Germany. [Downloadable!]
  3. Claessens, Stijn, 2005. "Access to financial services: a review of the issues and public policy objectives," Policy Research Working Paper Series 3589, The World Bank. [Downloadable!]
    Other versions:
  4. Francisco A. Gallego & F. Leonardo Hernández, 2003. "Microeconomic effects of capital controls: The chilean experience during the 1990s," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(3), pages 225-253. [Downloadable!]
    Other versions:
  5. Stijn Claessens & Simeon Djankov & Tatiana Nenova, 1999. "Corporate growth and risk around the world," Proceedings, Federal Reserve Bank of San Francisco, issue Sep. [Downloadable!]
  6. Julio de Brun & Eduardo Barbieri & Nestor Gandelman, 2002. "Investment Equations and Financial Restrictions at Firm Level: The Case of Uruguay," RES Working Papers 3155, Inter-American Development Bank, Research Department. [Downloadable!]
  7. Claessens, Stijn & Djankov, Simeon & Nenova, Tatiana, 2000. "Corporate risk around the world," Policy Research Working Paper Series 2271, The World Bank. [Downloadable!]
  8. Richard J. Herring & Nathporn Chatusripitak, 2000. "The Case of the Missing Market: The Bond Market and Why It Matters for Financial Development," Center for Financial Institutions Working Papers 01-08, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  9. Schmukler, Sergio & Versperoni, Esteban, 2000. "Globalization and firms'financing choices - evidence from emerging economies," Policy Research Working Paper Series 2323, The World Bank. [Downloadable!]
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  10. Ferro, Gustavo & Antón Rodríguez, Martín, 2007. "Crédito, producto y eficiencia en la producción de crecimiento
    [Credit, production and efficiency in the production of growth]    ," MPRA Paper 15094, University Library of Munich, Germany, revised Mar 2009. [Downloadable!]
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