Financial Dependence and Growth

Does finance affect economic growth? A number of studies have identified a positive correlation between the level of development of a country's financial sector and the rate of growth of its per capita income. As has been noted elsewhere, the observed correlation does not necessarily imply a causal relationship. This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship; that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more developed financial markets. We find this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality.

[1]  M. Obstfeld.  Risk-Taking, Global Diversification, and Growth , 1992 .

[2]  Boyan Jovanovic,et al.  Financial Development, Growth, and the Distribution of Income , 1989, Journal of Political Economy.

[3]  M. C. Jensen,et al.  THEORY OF THE FIRM: MANAGERIAL BEHAVIOR, AGENCY COSTS AND OWNERSHIP STRUCTURE , 1976 .

[4]  S. Myers.  Determinants of corporate borrowing , 1977 .

[5]  E. Fama,et al.  What's different about banks?☆ , 1985 .

[6]  Peter J. Klenow,et al.  Ideas versus rival human capital: Industry evidence on growth models , 1998 .

[7]  Philip E. Strahan,et al.  The Finance-Growth Nexus: Evidence from Bank Branch Deregulation , 1996 .

[8]  N. Mankiw.  The Growth of Nations , 1995 .

[9]  Raymond W. Goldsmith,et al.  Financial Structure and Development , 1970 .

[10]  M. Petersen,et al.  Trade Credit: Theories and Evidence , 1996 .

[11]  Robert G. King,et al.  Finance, entrepreneurship and growth , 1993 .

[12]  Masahiko Aoki,et al.  The Japanese Main Bank System , 1995 .

[13]  Florencio López‐de‐Silanes,et al.  Law and Finance , 1996, Journal of Political Economy.

[14]  Douglas W. Diamond.  Reputation Acquisition in Debt Markets , 1989, Journal of Political Economy.

[15]  K. Faxén,et al.  Wages, Growth and the Distribution of Income , 1969 .

[16]  G. Ohlin,et al.  France and the Economic Development of Europe, 1800-1914. , 1961 .

[17]  Douglas W. Diamond.  Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt , 1991, Journal of Political Economy.

[18]  R. Levine.  Stock Markets, Growth, and Tax Policy , 1991 .

[19]  Alan M. Taylor,et al.  Domestic Saving and International Capital Flows Reconsidered , 1994 .

[20]  H. Broadman,et al.  Finance and Growth: Schumpeter Might Be Right , 1993 .

[21]  Timothy F. Bresnahan,et al.  Empirical studies of industries with market power , 1989 .

[22]  G. Saint‐Paul.  Technological Choice, Financial Markets and Economic Development , 1992 .

[23]  Douglas W. Diamond.  Financial Intermediation and Delegated Monitoring , 1984 .

[24]  B. Smith,et al.  Financial Intermediation and Endogenous Growth , 1991 .

[25]  D. C. Cole,et al.  Financial Deepening in Economic Development. , 1974 .

[26]  D. Weil,et al.  A Contribution to the Empirics of Economic Growth Author ( s ) : , 2008 .

[27]  C. Mayer.  Financial Systems, Corporate Finance and Economic Development , 1990 .

[28]  Financing Constraints and Corporate Investment , 1988 .

[29]  R. Levine,et al.  A Sensitivity Analysis of Cross-Country Growth Regressions , 1991 .

[30]  Christina H. Paxson.  Saving and Growth: Evidence from Micro Data , 1995 .

[31]  Jeremy C. Stein,et al.  Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior , 1989 .

[32]  J. Boyd,et al.  The Coevolution of the Real and Financial Sectors in the Growth Process , 1996 .

[33]  K. French,et al.  Investor Diversification and International Equity Markets , 1991 .

[34]  Lant Pritchett,et al.  Good Policy or Good Luck? Country Growth Performance and Temporary Shocks , 1993 .

[35]  R. Cameron,et al.  Banking in the early stages of industrialization;: A study in comparative economic History , 1967 .

[36]  Philip M. Marcus,et al.  The Visible Hand: The Managerial Revolution in American Business , 1979 .

[37]  J. Stiglitz,et al.  Credit Rationing in Markets with Imperfect Information , 1981 .

[38]  R. Barro,et al.  International Comparisons of Educational Attainment , 1993 .

[39]  Sherrill Shaffer,et al.  Working Papers Working Papers Working Papers Working Papers the Winner's Curse in Banking the Winner's Curse in Banking , 2022 .

[40]  R. Rajan,et al.  What Do We Know About Capital Structure? Some Evidence from International Data , 1994 .

[41]  Gustav Ranis,et al.  A theory of economic development. , 1961 .

[42]  Campbell R. Harvey,et al.  Time-Varying World Market Integration , 1994 .

[43]  Jean Tirole,et al.  Market Liquidity and Performance Monitoring , 1993, Journal of Political Economy.

[44]  M. Pagano,et al.  Why Do Companies Go Public? An Empirical Analysis , 1995 .

[45]  Marco Pagano,et al.  Financial markets and growth: An overview☆ , 1993 .

[46]  Christopher M. James,et al.  Some evidence on the uniqueness of bank loans , 1987 .

[47]  Raimar Richers.  The theory of economic development , 1961 .

[48]  S. Kaplan,et al.  Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints? , 1997 .

[49]  P. Samuelson,et al.  Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods - , 1976 .

[50]  Holland Hunter,et al.  Economic Backwardness in Historical Perspective , 1963 .