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Investment in Relationship-Specific Assets: Does Finance Matter?

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  • Kukenova, Madina
  • Strieborny, Martin

Abstract

We show that contract-intensive industries grow disproportionately faster both in countries with a high initial level of financial development and in the US states which deregulated their banking sector. These industries use a high share of relationship-specific inputs that can be purchased only via specific contracts with the suppliers. Accordingly, both firms in those industries and their suppliers face above-average levels of risk and transaction costs. Our empirical results thus confirm the theoretical claim that finance promotes the real economy via managing risk and decreasing transaction costs. Furthermore, the pro-growth effect of finance seems to come from financial intermediaries like banks rather than from stock markets. This suggests that the intrinsic functions of relationship-banking (long-term commitment, increase in reputation and planning horizon of the borrowers) are especially important for the contract-intensive industries.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16051.

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Date of creation: 03 Jul 2009
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Handle: RePEc:pra:mprapa:16051

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Keywords: financial development; relationship-specific investment; growth;

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Cited by:
  1. Strieborny, Martin, 2013. "Suppliers, Investors, and Equity Market Liberalizations," Working Papers 2013:12, Lund University, Department of Economics.
  2. Tingvall, Patrik Gustavsson & Poldahl, Andreas, 2011. "Determinants of Firm R&D: The Role of Relationship-specific Interactions for R&D Spillovers," Working Paper Series in Economics and Institutions of Innovation 251, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  3. Heyman, Fredrik & Gustavsson Tingvall, Patrik, 2012. "The Dynamics of Offshoring and Institutions," Working Paper Series 919, Research Institute of Industrial Economics.

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