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Law, Finance, and Firm Growth

Author

Listed:
  • Asli Demirgüç-Kunt

    (World Bank,)

  • Vojislav Maksimovic

    (Robert H. Smith School of Business at the University of Maryland)

Abstract

We investigate how differences in legal and financial systems affect firms' use of external financing to fund growth. We show that in countries whose legal systems score high on an efficiency index, a greater proportion of firms use long-term external financing. An active, though not necessarily large, stock market and a large banking sector are also associated with externally financed firm growth. The increased reliance on external financing occurs in part because established firms in countries with well-functioning institutions have lower profit rates. Government subsidies to industry do not increase the proportion of firms relying on external financing. Copyright The American Finance Association 1998.

Suggested Citation

  • Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
  • Handle: RePEc:bla:jfinan:v:53:y:1998:i:6:p:2107-2137
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