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Financial development and financing constraints - international evidence from the structural investment model

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Author Info
Love, Inessa
Abstract

The relationship between the financial, and real sides of the economy has long been a topic of intense interest, and debate. The author provides microeconomic evidence that financial development aids growth, by reducing financing constraints that would otherwise restrict efficient firm investment. The author estimates a structural model, based on the Euler equation for investment, using firm-level data from forty countries. The results show a strong negative relationship between the extent of financial market development, and the sensitivity of investment, to the availability of internal funds (a proxy for financing constraints). Considering size effects, business cycles, and the legal environment as plausible alternative explanations, the author finds the results to be robust in all cases.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2694.

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Date of creation: 31 Oct 2001
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Handle: RePEc:wbk:wbrwps:2694

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Keywords: International Terrorism&Counterterrorism Economic Theory&Research Decentralization Environmental Economics&Policies Payment Systems&Infrastructure Economic Theory&Research Environmental Economics&Policies Financial Intermediation Banks&Banking Reform International Terrorism&Counterterrorism

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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. Kang-Kook Lee & James Crotty, 2004. "Was the IMF's Imposition of Economic Regime Change Justified? A Critique of the IMF's Economic and Political Role in Korea During and After the Crisis," Working Papers wp77, Political Economy Research Institute, University of Massachusetts at Amherst. [Downloadable!]
  2. Nandini Gupta & Kathy Yuan, 2003. "Financial Dependence, Stock Market Liberalizations, and Growth," William Davidson Institute Working Papers Series 2003-562, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  3. Charles P. Himmelberg & R. Glenn Hubbard & Inessa Love, 2002. "Investment, protection, ownership, and the cost of capital," Research series 200205-6, National Bank of Belgium. [Downloadable!]
  4. Hoyt Bleakley & Kevin Cowan, 2002. "Corporate dollar debt and depreciations: much ado about nothing?," Working Papers 02-5, Federal Reserve Bank of Boston. [Downloadable!]
  5. Marialuz Moreno Badia & Veerle Slootmaekers, 2008. "The Missing Link Between Financial Constraints and Productivity," LICOS Discussion Papers 20808, LICOS - Centre for Institutions and Economic Performance, K.U.Leuven. [Downloadable!]
  6. Forbes, Kristin J., 2003. "One Cost of the Chilean Capital Controls: Increased Financial Constraints for Smaller Traded Firms," Working papers 4273-02, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
    Other versions:
  7. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2002. "Financial and legal constraints to firm growth - Does size matter?," Policy Research Working Paper Series 2784, The World Bank. [Downloadable!]
  8. Beck, Thorsten & Demirguc-Kant, Asl' & Maksimovic, Vojislav, 2003. "Bank competition, financing obstacles, and access to credit," Policy Research Working Paper Series 2996, The World Bank. [Downloadable!]
  9. Hoyt Bleakley & Kevin Cowan, 2005. "Maturity mismatch and financial crises: evidence from emerging market corporations," Proceedings, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  10. Beck, Thorsten & Asl Demirguc-Kunt & Maksimovic,Vojislav, 2002. "Financing patterns around the world : the role of institutions," Policy Research Working Paper Series 2905, The World Bank. [Downloadable!]
  11. Himmelberg, Charles P. & Hubbard, R. Glenn & Love, Inessa, 2002. "Investor protection, ownership, and the cost of capital," Policy Research Working Paper Series 2834, The World Bank. [Downloadable!]
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