Risk Sharing and Firm Size: Theory and International Evidence

39 Pages Posted: 27 Mar 2001

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Date Written: March 2001

Abstract

This paper investigates the relation between financial development and firm size. The model shows that the quality of laws, by affecting the level of monitoring costs, has an effect on risk sharing and, through this channel, on the investor basis and the availability of external finance to firms. If, because of the high monitoring costs, the provision of finance to projects is concentrated in very few individuals, the risk premium rises with the amount of funds firms demand. As a consequence, in countries where the financial system does not favor risk sharing, the larger the optimal size of a firm would be, the higher is the cost of external finance; this limits firm size. Empirical evidence is also provided. In countries where the financial system is less developed, financial constraints, indeed, appear more stringent for firms whose optimal size is larger and the cost of debt is higher for firms demanding larger loans, even after controlling for leverage and other firm characteristics.

Keywords: risk sharing, firm size, financial constraints, financial development

JEL Classification: G3, O16, L1

Suggested Citation

Giannetti, Mariassunta, Risk Sharing and Firm Size: Theory and International Evidence (March 2001). Available at SSRN: https://ssrn.com/abstract=262788 or http://dx.doi.org/10.2139/ssrn.262788

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
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SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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