Financial Dependence and Growth Revisited

23 Pages Posted: 27 Mar 2003 Last revised: 1 Nov 2010

See all articles by Raymond J. Fisman

Raymond J. Fisman

National Bureau of Economic Research (NBER); Boston University

Inessa Love

World Bank - Development Economics Data Group (DECDG)

Date Written: March 2003

Abstract

In this note, we revisit an earlier, highly influential paper on Financial Dependence and Growth by Rajan and Zingales (1998), by re-examining their assumptions, and the robustness of their results to alternative theories and interpretations. We first show that they may be implicitly testing whether financial intermediaries allow firms to better respond to global shocks to growth opportunities, rather than the extent that financial intermediaries allow firms to grow in industries with an inherent (technological) financial dependence. Furthermore, if this is the case, we claim that there exists a more direct measure of growth opportunities. In particular, if U.S. capital markets are perfect, then actual growth in the U.S. is a good proxy for global growth opportunities. We test this directly, by including U.S. industry growth in Rajan and Zingales' original specification, and find that our direct growth measure outperforms their financial dependence measure and, moreover, is less vulnerable to controlling for outliers and level of development. This still suggests an important role for finance in the allocation of resources, but shifts the emphasis from 'financial dependence' to 'global growth opportunities.'

Suggested Citation

Fisman, Raymond and Love, Inessa, Financial Dependence and Growth Revisited (March 2003). NBER Working Paper No. w9582. Available at SSRN: https://ssrn.com/abstract=389453

Raymond Fisman (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
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Inessa Love

World Bank - Development Economics Data Group (DECDG) ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/ilove

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