Financial Development, Endogenous Dependence on External Financing, and Trade

58 Pages Posted: 8 May 2020

Date Written: April 2020

Abstract

Influential papers on how credit constraints affect international trade have shown a tendency to assume that asset tangibility and the share of external borrowing are exogenous industry characteristics that are time‐ and country‐invariant. In the finance literature, however, the share of external borrowing is viewed as endogenous and dependent on the amount of collateral that a firm can provide (and thus, implicitly, on its asset tangibility). Drawing from the finance literature, I hypothesize that there are supply‐side factors that exert substantial influences on the share of external financing. I test this new perspective with country‐ and industry‐specific measures of asset tangibility and external borrowing. I find that (i) the share of external borrowing increases in asset tangibility, and (ii) the sectoral rankings of asset tangibility and the share of external borrowing vary significantly across countries. Further, I develop a theoretical model to investigate the impact of financial development and asset tangibility on the demand and supply of external finance and exports. The model yields theoretical predictions that are consistent with, and provide intuition for, the above results. Both the model and my empirical results demonstrate that industries with more tangible assets export more from countries with high levels of financial development.

Suggested Citation

Choi, ByeongHwa, Financial Development, Endogenous Dependence on External Financing, and Trade (April 2020). Economica, Vol. 87, Issue 346, pp. 530-587, 2020, Available at SSRN: https://ssrn.com/abstract=3595592 or http://dx.doi.org/10.1111/ecca.12309

ByeongHwa Choi (Contact Author)

Indiana University ( email )

Wylie Hall 105
100 South Woodlawn
Bloomington, IN 47405
United States

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