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Revisiting the external financial dependence index in light of the rise of corporate net lending: What do we really measure?

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  • Villani, Davide

Abstract

This paper revisits the External Financial Dependence (EFD) index originally formulated employing data for American firms in the 1980s by Rajan and Zingales (1998). This index is meant to reflect technological characteristics of the industries and it is commonly assumed that its values are stable in time and across countries. Despite its popularity, there have been reduced attempts to extend the original estimations. This paper fills this gap, providing new estimations of the EFD index for G7 countries between 1980 and 2015. First, we argue that, theoretically, there are different factors (mostly related to technical change) that can alter the values of the EFD index. Second, we show that the assumptions of stability in time and space find little empirical support. Third, it is maintained that the EFD index can be considered a proxy of corporate net lending as there are significant theoretical and empirical similarities between the two concepts.

Suggested Citation

  • Villani, Davide, 2021. "Revisiting the external financial dependence index in light of the rise of corporate net lending: What do we really measure?," Structural Change and Economic Dynamics, Elsevier, vol. 58(C), pages 361-376.
    • Handle: RePEc:eee:streco:v:58:y:2021:i:c:p:361-376
    DOI: 10.1016/j.strueco.2021.06.007
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    JEL classification:

    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • G3 - Financial Economics - - Corporate Finance and Governance
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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