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Financial Development and Allocation of External Finance

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  • Jan Bena
  • Peter Ondko

Abstract

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.

Suggested Citation

  • Jan Bena & Peter Ondko, 2009. "Financial Development and Allocation of External Finance," CERGE-EI Working Papers wp398, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp398
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    More about this item

    Keywords

    Financial development; external finance; allocative efficiency;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G3 - Financial Economics - - Corporate Finance and Governance

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