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Financial Development and Allocation of External Finance

  • Jan Bena
  • Peter Ondko
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We examine whether financial systems facilitate efficient allocation of resources into perspective projects. Employing European micro-level data from 1996-2005, we show that firms in industries with the best growth opportunities use more external finance in financially more developed countries. The result is robust to controlling for technology determinants of external finance and to choosing different proxies for growth opportunities. We also find that the explanatory power of the technology determinants decreases significantly once growth opportunities are controlled for, which suggests that the often used measures of determinants of external finance are partly driven by growth opportunities.

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File URL: http://www.cerge-ei.cz/pdf/wp/Wp398.pdf
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Paper provided by The Center for Economic Research and Graduate Education - Economics Institute, Prague in its series CERGE-EI Working Papers with number wp398.

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Date of creation: Nov 2009
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Handle: RePEc:cer:papers:wp398
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  1. Cristina Arellano & Yan Bai & Jing Zhang, 2009. "Firm dynamics and financial development," Staff Report 392, Federal Reserve Bank of Minneapolis.
  2. Rajan, Raghuram G & Zingales, Luigi, 1998. "Financial Dependence and Growth," American Economic Review, American Economic Association, vol. 88(3), pages 559-86, June.
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  8. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
  9. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
  10. Øivind Anti Nilsen & Fabio Schiantarelli, 2003. "Zeros and Lumps in Investment: Empirical Evidence on Irreversibilities and Nonconvexities," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1021-1037, November.
  11. Jeffrey Wurgler, 1999. "Financial Markets And The Allocation Of Capital," Yale School of Management Working Papers ysm123, Yale School of Management, revised 01 Mar 2001.
  12. Bena, Jan & Jurajda, Stepan, 2007. "Which Firms Benefit More from Financial Development?," CEPR Discussion Papers 6392, C.E.P.R. Discussion Papers.
  13. Raymond Fisman & Inessa Love, 2007. "Financial Dependence and Growth Revisited," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 470-479, 04-05.
  14. Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2002. "When Does the Market Matter? Stock Prices and the Investsment of Equity-Dependent Firms," Harvard Institute of Economic Research Working Papers 1978, Harvard - Institute of Economic Research.
  15. Anna Ilyina & Roberto M. Samaniego, 2008. "Technology and Finance," IMF Working Papers 08/182, International Monetary Fund.
  16. Klapper, Leora & Laeven, Luc & Rajan, Raghuram, 2006. "Entry regulation as a barrier to entrepreneurship," Journal of Financial Economics, Elsevier, vol. 82(3), pages 591-629, December.
  17. Islam, Saiyid S. & Mozumdar, Abon, 2007. "Financial market development and the importance of internal cash: Evidence from international data," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 641-658, March.
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