Financial Development and Allocation of External Finance

CERGE-EI Working Paper Series No. 398

54 Pages Posted: 7 Dec 2009

See all articles by Jan Bena

Jan Bena

Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences

Peter Ondko

Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences

Date Written: November 1, 2009

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.

Keywords: financial development, external finance, allocative efficiency

JEL Classification: F3, O16, G3

Suggested Citation

Bena, Jan and Ondko, Peter, Financial Development and Allocation of External Finance (November 1, 2009). CERGE-EI Working Paper Series No. 398, Available at SSRN: https://ssrn.com/abstract=1517181 or http://dx.doi.org/10.2139/ssrn.1517181

Jan Bena (Contact Author)

Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences ( email )

Politickych veznu 7
Prague, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

Peter Ondko

Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences ( email )

Politickych veznu 7
Prague, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

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