Financial constraints, uses of funds, and firm growth : an international comparison

The authors focus on two issues. First they examine whether firms in different countries finance long-term and short term investment similarly. Second, they investigate whether differences in financial systems and legal institutions across countries are reflected in the ability of firms to grow faster than they might have by relying on their internal resources or short term borrowing. Across their sample they find: a) positive correlations between investment in plant and equipment and retained earnings; b) negative correlations between investment in plant and equipment and external financing; c) negative correlations between investment in short-term assets and retained earnings; and d) positive correlations between investments in short term assets and external financing. These findings suggest that financial markets and intermediaries have a comparative advantage in funding short-term investment. For each firm they estimate a predicted growth rate if it does not rely on long-term external financing. They show that the proportion of firms that grow faster than the predicted rate in each country is associated with specific features of the legal system, financial markets, and institutions. An active stock market and high scores on an index of respect for legal norms are associated with faster than predicted rates of firm growth. They present evidence that the law-and-order index measures the ability of creditors and debtors to enter into long-term contracts. Government subsidies to industry do not increase the proportion of firms growing faster than predicted.