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Adjustment to Target Capital, Finance and Growth

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  • Ciccone, Antonio
  • Papaioannou, Elias

Abstract

Does financial development result in capital being reallocated more rapidly to industries where it is most productive? We argue that if this was the case, financially developed countries should see faster growth in industries with investment opportunities due to global demand and productivity shifts. Testing this cross-industry cross-country growth implication requires proxies for (latent) global industry investment opportunities. We show that tests relying only on data from specific (benchmark) countries may yield spurious evidence for or against the hypothesis. We therefore develop an alternative approach that combines benchmark-country proxies with a proxy that does not reflect opportunities specific to a country or level of financial development. Our empirical results yield clear support for the capital reallocation hypothesis.

Suggested Citation

  • Ciccone, Antonio & Papaioannou, Elias, 2006. "Adjustment to Target Capital, Finance and Growth," CEPR Discussion Papers 5969, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5969
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    More about this item

    Keywords

    Financial development; Sector analysis; Growth; Measurement error; Investment opportunities;
    All these keywords.

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E - Macroeconomics and Monetary Economics
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • F30 - International Economics - - International Finance - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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