Financial Constraints, Uses of Funds and Firm Growth: An International Comparison

54 Pages Posted: 13 Jan 2005

See all articles by Vojislav Maksimovic

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Asli Demirgüç-Kunt

World Bank

Date Written: August 1996

Abstract

In this paper we focus on two issues. First, we examine whether firms in a thirty country sample finance long-term and short-term investment similarly. Second, we investigate whether perceived differences in the efficiency of the legal systems and in financial institutions across countries are reflected in the ability of firms to obtain external financing and grow at rates greater than they could attain by relying on their internal resources or short-term borrowing. Across our sample, we find positive correlations between investment in plant and equipment and retained earnings, and negative correlations between investment in plant and equipment and external financing. We find negative correlations between investment in short-term assets and retained earnings, and positive correlations between investment in short-term assets and external financing. The findings suggest that across different legal and financial systems, financial markets and intermediaries have a comparative advantage in funding short-term investment. For each firm our sample we estimate a predicted rate at which it can grow if it does not rely on long-term external financing. We show that the proportion of firms that grow at rates exceeding this predicted rate in each country is associated with specific features of the legal system, financial markets and institutions. In countries whose legal systems score high on the efficiency index a greater proportion of firms use long-term external financing, in particular, long-term debt. An active, though not necessarily large, stock market and a large banking sector are also associated with externally financed firm growth. In our sample government subsidies to industry to not increase the proportion of firms growing at rates that exceed the predicted rate.

JEL Classification: G31, G32, G38, K22

Suggested Citation

Maksimovic, Vojislav and Demirgüç-Kunt, Asli, Financial Constraints, Uses of Funds and Firm Growth: An International Comparison (August 1996). Available at SSRN: https://ssrn.com/abstract=10202

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business ( email )

Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2125 (Phone)
301-314-9157 (Fax)

HOME PAGE: http://scholar.rhsmith.umd.edu/vmax/home

Asli Demirgüç-Kunt (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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