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

54 Pages Posted: 20 Apr 2016

See all articles by Vojislav Maksimovic

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

Asli Demirgüç-Kunt

World Bank

Date Written: October 1996

Abstract

The findings suggest that across very different financial systems, financial markets and intermediaries have a comparative advantage in funding short-term investment. An active, though not necessarily large, stock market and high scores on an index of respect for legal norms are associated with faster than predicted rates of firm growth. Government subsidies to industry do not increase the proportion of firms growing faster than predicted.

Demirguc-Kunt and Maksimovic focus on two issues. First, they examine whether firms in different countries finance long-term and short-term investment similarly. Second, they investigate whether differences in financial systems and legal institutions across countries are reflected in the ability of firms to grow faster than they might have by relying on their internal resources or short-term borrowing.

Across their sample, they find:

- Positive correlations between investment in plant and equipment and retained earnings. - Negative correlations between investment in plant and equipment and external financing. - Negative correlations between investment in short-term assets and retained earnings. - Positive correlations between investment in short-term assets and external financing.

These findings suggest that across very different financial systems, financial markets and intermediaries have a comparative advantage in funding short-term investment.

For each firm in their sample, they estimate a predicted rate at which it can grow if it does not rely on long-term external financing. They show that the proportion of firms that grow faster than the predicted rate in each country is associated with specific features of the legal system, financial markets, and institutions.

An active, though not necessarily large, stock market and high scores on an index of respect for legal norms are associated with faster than predicted rates of firm growth.

They present evidence that the law-and-order index measures the ability of creditors and debtors to enter into long-term contracts. Government subsidies to industry do not increase the proportion of firms growing faster than predicted.

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to understand the impact of financial constraints on firm growth.

Suggested Citation

Maksimovic, Vojislav and Demirgüç-Kunt, Asli, Financial Constraints, Uses of Funds, and Firm Growth: An International Comparison (October 1996). Available at SSRN: https://ssrn.com/abstract=569256

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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