Financial Development and Financing Constraints : International Evidence from the Structural Investment Model

Financial Development and Financing Constraints : International Evidence from the Structural Investment Model

The relationship between the financial, and real sides of the economy has long been a topic of intense interest, and debate. The author provides microeconomic evidence that financial development aids growth, by reducing financing constraints that would otherwise restrict efficient firm investment. The author estimates a structural model, based on the Euler equation for investment, using firm-level data from forty countries. The results show a strong negative relationship between the extent of financial market development, and the sensitivity of investment, to the availability of internal funds (a proxy for financing constraints). Considering size effects, business cycles, and the legal environment as plausible alternative explanations, the author finds the results to be robust in all cases.

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Bibliographic Details
Main Author: Love, Inessa
Language:English
en_US
Published: World Bank, Washington, DC 2001-10
Subjects:ACCOUNTING, ASYMMETRIC INFORMATION, BUSINESS CYCLES, CAPITAL ACCUMULATION, CAPITAL ALLOCATION, CAPITAL MARKETS, CAPITALIZATION, CONSTANT RETURNS TO SCALE, COST OF CAPITAL, DEBT, DEMAND ELASTICITY, DISCOUNT RATE, DISCOUNT RATES, DISCOUNTED VALUE, DIVIDENDS, ECONOMIC GROWTH, ECONOMIC OUTCOMES, ECONOMICS, ECONOMISTS, ELASTICITY, EMPIRICAL EVIDENCE, EMPIRICAL STUDIES, EXTERNAL FINANCING, FINANCIAL DECISIONS, FINANCIAL INTERMEDIARIES, FINANCIAL MARKETS, FINANCIAL SECTOR, FIXED COSTS, FUTURE RESEARCH, GDP, INFORMATION ASYMMETRIES, INTANGIBLE ASSETS, INTEREST RATE, LESS DEVELOPED COUNTRIES, LIQUID ASSETS, LIQUIDITY, M3, MARGINAL COST, MARGINAL PRODUCT, MARGINAL PRODUCTIVITY, MARKET POWER, MARKETABLE SECURITIES, MERGERS, NET WORTH, NPV, OPTIMIZATION, PERFECT COMPETITION, PRESENT VALUE, PRODUCTION FUNCTION, PROFIT MAXIMIZATION, RATIONAL EXPECTATIONS, REGRESSION ANALYSIS, SAVINGS, SECURITIES, THEORETICAL MODELS, VALUE ADDED, VARIABLE COSTS,
Online Access:http://documents.worldbank.org/curated/en/2001/10/1615068/financial-development-financing-constraints-international-evidence-structural-investment-model
https://hdl.handle.net/10986/19513
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Summary:The relationship between the financial, and real sides of the economy has long been a topic of intense interest, and debate. The author provides microeconomic evidence that financial development aids growth, by reducing financing constraints that would otherwise restrict efficient firm investment. The author estimates a structural model, based on the Euler equation for investment, using firm-level data from forty countries. The results show a strong negative relationship between the extent of financial market development, and the sensitivity of investment, to the availability of internal funds (a proxy for financing constraints). Considering size effects, business cycles, and the legal environment as plausible alternative explanations, the author finds the results to be robust in all cases.

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