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Does Local Financial Development Matter?

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Author Info
Guiso, Luigi
Sapienza, Paola
Zingales, Luigi

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Abstract

We study the effects of differences in local financial development within an integrated financial market. To do so, we construct a new indicator of financial development by estimating a regional effect on the probability that, ceteris paribus, a household is shut off from the credit market. By using this indicator we find that financial development enhances the probability an individual starts their own business, favours entry, increases competition, and promotes growth of firms. As predicted by theory, these effects are weaker for larger firms, which can more easily raise funds outside of the local area. Overall, the results suggest local financial development is an important determinant of the economic success of an area even in an environment where there are no frictions to capital movements.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3307.

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Date of creation: Mar 2002
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Handle: RePEc:cpr:ceprdp:3307

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Related research
Keywords: economic development; entrepreneurship; financial development; financial integration;

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G30 - Financial Economics - - Corporate Finance and Governance - - - General

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References listed on IDEAS
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  3. Sapienza, Paola, 2002. "What Do State-Owned Firms Maximize? Evidence from the Italian Banks," CEPR Discussion Papers 3168, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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    Other versions:
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  18. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 639-70, August. [Downloadable!] (restricted)
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