Financial dependence and growth: further evidence

Abstract

This article empirically shows that in developing countries, financial development facilitates firms to grow disproportionately in industries with higher external finance dependence or better growth opportunities. This effect is absent in developed countries.

Acknowledgements

I am grateful to Raghuram Rajan and Luigi Zingales, for the use of their data and Shravan Luckraz for his comments and advice. The usual disclaimer applies.

Notes

¹ For the sample of developing countries, we use bank credit and total capitalization as the proxy for the financial development. Accounting Standard measure is unavailable for 9 of the 20 countries in the sample.

Table 1. The effect of financial development on industry growth

² Identifies the legal origin of the Company Law or Commercial Code of each country. There are four possible origins: (1) English Common law; (2) French Commercial Code; (3) German Commercial Code; (4) Scandinavian Commercial Code. Source: La Porta et al. (1998). They suggest that legal system has an effect on the development of a domestic capital market.

³ Countries differ in law enforcement. The Rule of Law Index, which captures the efficiency and integrity of the legal system (produced by Business International Corporation), is also used as instrument.

⁴ Robust regression is an iterative procedure which begins with OLS estimation, obtains residuals and residual diagnostics (such as Cook's D) and iteratively assigns smaller weights using Huber's formulae such that observations with larger residuals (i.e. outlier) observation is assigned lower weights. This procedure mitigates the effect of these influential observations. See Stata Manual, 2002, rreg procedure, for further details.