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Financial Dependence and Growth Revisited

  • Raymond Fisman
  • Inessa Love

We revisit an earlier, highly influential paper on financial dependence and growth by Rajan and Zingales (1998). We re-examine their assumptions, and the robustness of their results to alternative theories and interpretations. We first show that they may be implicitly testing whether financial intermediaries allow firms to better respond to global shocks to growth opportunities, rather than the extent that financial intermediaries allow firms to grow in industries with an inherent (technological) financial dependence. We propose a more direct measure of growth opportunities: If U.S. capital markets are perfect, then actual growth in the U.S. is a good proxy for global growth opportunities. We test this directly, by including U.S. industry growth in Rajan and Zingales's original specification, and find that our direct growth measure outperforms their financial dependence measure and is less vulnerable to controlling for outliers and level of development. This still suggests an important role for finance in the allocation of resources, but shifts the emphasis from "financial dependence" to "global growth opportunities." (JEL: F3, G1, O4) (c) 2007 by the European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 5 (2007)
Issue (Month): 2-3 (04-05)
Pages: 470-479

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Handle: RePEc:tpr:jeurec:v:5:y:2007:i:2-3:p:470-479
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  1. Wurgler, Jeffrey, 2000. "Financial markets and the allocation of capital," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 187-214.
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  8. Rafael La Porta & Florencio Lopezde-Silanes & Andrei Shleifer, 2000. "Government Ownership of Banks," NBER Working Papers 7620, National Bureau of Economic Research, Inc.
  9. Nicola Cetorelli & Michele Gambera, 1999. "Banking market structure, financial dependence and growth: international evidence from industry data," Working Paper Series WP-99-8, Federal Reserve Bank of Chicago.
  10. Beck, Thorsten & Levine, Ross, 2002. "Industry growth and capital allocation:*1: does having a market- or bank-based system matter?," Journal of Financial Economics, Elsevier, vol. 64(2), pages 147-180, May.
  11. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
  12. Clarke, George R. & Cull, Robert, 1998. "Why privatize? : the case of Argentina's public provincial banks," Policy Research Working Paper Series 1972, The World Bank.
  13. Vlachos, Jonas & Svaleryd, Helena, 2001. "Financial Markets, the Pattern of Specialization and Comparative Advantage. Evidence from OECD countries," SSE/EFI Working Paper Series in Economics and Finance 449, Stockholm School of Economics, revised 03 Sep 2001.
  14. 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.
  15. Laeven, Luc & Klingebiel, Daniela & Kroszner, Randy, 2002. "Financial crises, financial dependence, and industry growth," Policy Research Working Paper Series 2855, The World Bank.
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