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Financial and legal constraints to firm growth - Does size matter?

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Author Info
Beck, Thorsten
Demirguc-Kunt, Asli
Maksimovic, Vojislav

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Abstract

Using a unique firm-level survey data base, covering fifty four countries, the authors investigate whether different financial, legal, and corruptionissues that firms report as constraints, actually affect their growth rates. The results show that the extent to which these factors constrain a firm's growth depends very much on its size, and that it is consistently the smallest firms that are most adversely affected by all these constraints. Firm growth is more affected by reported constraints in countries with underdeveloped financial, and legal systems, and higher corruption. So, policy measures to improve financial, and legal development, and reduce corruption are well justified in promoting firm growth, particularly the development of the small, and medium enterprise sector. But the evidence also shows that the intuitive descriptors of an"efficient"legal system, are not correlated with the components of the general legal constraints that predict firm growth. This finding suggests that the mechanism by which the legal system affects firm performance, is not well understood. The authors'findings also provide evidence that the corruption of bank officials, constraints firm growth. This"institutional failure"should be taken into account, when modeling the monitoring role of financial institutions in overcoming market failures due to informational asymmetries.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2784.

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Date of creation: 28 Feb 2002
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Handle: RePEc:wbk:wbrwps:2784

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Keywords: Payment Systems&Infrastructure; Decentralization; Small Scale Enterprise; Legal Products; Microfinance; Governance Indicators; National Governance; Legal Products; Microfinance; Private Participation in Infrastructure;

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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. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2001. "Firms as financial intermediaries - evidence from trade credit data," Policy Research Working Paper Series 2696, The World Bank. [Downloadable!]
  2. Paolo Mauro, 1996. "The Effects of Corruption on Growth, Investment, and Government Expenditure," IMF Working Papers 96/98, International Monetary Fund.
  3. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2003. "Financial and legal institutions and firm size," Policy Research Working Paper Series 2997, The World Bank. [Downloadable!]
  4. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June. [Downloadable!] (restricted)
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  5. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300. [Downloadable!] (restricted)
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  6. Ball, Ray & Kothari, S. P. & Robin, Ashok, 2000. "The effect of international institutional factors on properties of accounting earnings," Journal of Accounting and Economics, Elsevier, vol. 29(1), pages 1-51, February. [Downloadable!] (restricted)
  7. Wurgler, Jeffrey, 2000. "Financial markets and the allocation of capital," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 187-214. [Downloadable!] (restricted)
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  8. Carlin, Wendy & Mayer, Colin, 1999. "Finance, Investment and Growth," CEPR Discussion Papers 2233, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  9. Simon Johnson & Daniel Kaufmann & John McMillan & Christopher Woodruff, 2003. "Why Do Firms Hide? Bribes and Unofficial Activity after Communism," Public Economics 0308004, EconWPA. [Downloadable!]
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  10. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Rene M. Stulz & Rohan Williamson, 2001. "Culture, Openness, and Finance," NBER Working Papers 8222, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December. [Downloadable!] (restricted)
  13. Schiffer, M. & Weder, B., 2001. "Firm Size and the Business Environment: Worldwide Survey Results," Papers 43, World Bank - International Finance Corporation.
  14. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December. [Downloadable!] (restricted)
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  15. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August. [Downloadable!] (restricted)
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  16. Love, Inessa, 2001. "Financial development and financing constraints - international evidence from the structural investment model," Policy Research Working Paper Series 2694, The World Bank. [Downloadable!]
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  17. Franco Modigliani & Enrico C. Perotti & Pieter van Oijen, 1998. "Security versus Bank Finance," Tinbergen Institute Discussion Papers 98-051/2, Tinbergen Institute.
  18. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 1999. "Institutions, financial markets, and firm debt maturity," Journal of Financial Economics, Elsevier, vol. 54(3), pages 295-336, December. [Downloadable!] (restricted)
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