Law, Endowment and Inequality in Access to Finance

Abstract

Theoretical work suggests an ambiguous relationship between the strength of institutions and the distribution of access to finance. Using a sample of listed firms from 70 countries, this study constructs country-level measures of inequality in access to external finance, and explores its relation to institutions. We show that inequality of access is positively related to financial development as well as inequality in the distribution of firm size, firm revenue, and residents’ incomes. Countries with stronger investor protection for equity and debt have higher inequality in equity and debt financing respectively, presumably as a result of higher efficiency in fund allocation. Finally, we find that the historical determinants of institutions, including the civil law tradition and the disease environment encountered by colonizers, are negatively related to inequality in access to external finance. The results support both law and endowment theories.

Keywords: capital concentration, endowment, external financing, financial development, investor protection, inequality, law

JEL Classification: G2, K2, O16, P51, N20