Financial Development and Allocation of External Finance
CERGE-EI Working Paper Series No. 398
54 Pages Posted: 7 Dec 2009
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: Suggested Citation
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