Explore the link between Financial Structures and Economic Growth for now, i need only introduction and literature reviewof 1200 words due in 15 HOU

Explore the link between Financial Structures and Economic Growth
for now, i need only introduction and literature reviewof 1200 words

due in 15 HOURS from now

Topic :

BIG TOPIC: Finance and Growth: Modern Theoretical Approach & Empirical Evidence
The fact that financial systems have become more sophisticated and more essential in shaping the development of global capitalism raised new debates on the role of finance in economic development. This lecture discusses the role of the financial sector in the economic growth process, raising an important question of causality between finance and growth, or in other words, looking at whether finance matters for growth or the other way round. To explore this we will overview a number of empirical studies investigating this issue at macro- and meso-levels of the analysis. This lecture will also provide some insights on whether it is important to distinguish between bank-based vs. market-based financial systems in studying the link between finance and growth. Finally, we will discuss some empirical literature looking at the role of finance for growth in the transition setting.

I choose: Explore the link between Financial Structures and Economic Growth

About this course: The module is assessed 100% by a coursework assignment which consists of an assessed essay of max 3,500 words, which requires students to apply different theories and concepts covered in the curriculum to analyse financial development in transition economies and beyond. The aim is the empirical exploration of a research question. Ideally, students should use some of the skills learned in quantitative and qualitative research methods courses. More information can be found in the Coursework Guidelines on Moodle.

Key reading (the literature review HAVE TO write based on those readings):

Cihak, Martin, Asl Demirguc-Kunt, Erik Feyen, and Ross Levine. 2013. Financial Development in 205 Economies, 1960 to 2010. Journal of Financial Perspectives 1 (2): 1736. (Earlier version issued as Policy Research Working Paper 6175, World Bank, Washington, DC). Demirguc-Kunt, A. And R. Levine, 2008. Finance, Financial Sector Policies, and Long-Run Growth, World Bank Policy Research Working Papers, 4469 (available from World Bank website/Google search).

Calderon, C. and L. Liu, 2003. The Direction of Causality between Financial Development and Economic Growth, Journal of Development Economics 72, 321-334.
Demetriades, P. O. and Hussein, K., 1996. Does financial development cause economic growth? Time-series evidence from 16 countries. Journal of Development Economics, 51 (2), pp. 387-411. King, R. and R., Levine 1993. Finance and Growth: Schumpeter Might be Right. The Quarterly Journal of Economics, Vol. 108(3), pp. 717-737.

Levine, Ross. 2005. Finance and Growth: Theory and Evidence. In Phillippe Aghion, and Steven Durlauf, eds., Handbook of Economic Growth, Volume I.A. Amsterdam: North Holland.

Levine, R. and Zervos, S., 1998. Stock markets, banks and economic growth. American Economic Review, 88 (3), pp. 537-58.
Masten, A., Coricelli, F. and Masten, I. (2008). Non-linear growth effects of financial development: Does financial integration matter?. Journal of International Money and Finance, 27(2), pp.295-313.

Supplementary reading:

Gevorkyan Aleksandr V. and Otaviano Canuto (Eds) (2016) Financial Deepening and Post- Crisis Development in Emerging Markets: Current Perils and Future Dawns.
Sahay, R. et al. (2015) Rethinking Financial Deepening: Stability and Growth in Emerging Markets, https://www.imf.org/external/pubs/ft/sdn/2015/sdn1508.pdf

EBRD, 2015 Transition report 2015-16: Rebalancing Finance. London: Oxford University Press. EBRD, 2009. Transition Report 2009, Chapter 3: Development based on Financial Integration. Estrada, G., Park, D. and Ramayandi, A. (2010). Financial Development and Economic Growth in Developing Asia. [online] Asian Development Bank. Available at: https://www.adb.org/sites/default/files/publication/28277/economics-wp233.pdf Surname 3

Name
Professor
Course
Date

Capitalism and global economy

Capitalism is the form of political and economic system in which industry and trade of a country are controlled by the private owners and not the state. From the ideas of Lin (01), on capitalism, it is apparent that colonialism acted as a methodology of spreading capitalism because it was/is a political exploitation that spearheads an economic system characterized by greed. This aspect of greed due to capitalism as a fostering agent of colonialism holds true in the book Commissioner Lin: Letter to Queen Victoria, 1839 where it is depicted that when Chinese refused to open their country for colonialism, the British East India Company begun importing opium to Qin China (Lin, 01). This trading of opium caused a debilitating economic and social problem in China. In this regard, Britain wanted to expand its imperial power and increase its sales of goods in China, and led by the capitalist greediness begun selling opium to the Chinese in order to make them addicted to it so that it can continue selling the products to this new found economy (Module 2, Concept 2, Case Study 2, East Asia).
It is also important to note that global economy was the one thing that affected colonialism. The British were seemingly looking at the less developed economies to colonize and take control of their natural resources for their own gain. For instance, the British colonized China because they saw themselves as a superior race that has advanced economy and military tactics and weapons such that it was its responsibility to control the global economy. This is why when China was declining to be colonized they had to use the greedy capitalist mind of addicting the Chinese to opium so that they could create a dependency that would necessitate the trade between these two countries, and eventually lead to colonization.
Both capitalism and global economy played a role in the development or race. According to Josiah (438), the black Africans that lived south of Egypt had been in constant intercourse with Egypt as evidence depicts from ancient monuments as far as 4000 years back. However, these people had not made any strength towards civilization and they would not until they change their physical organization. By using the term physical organization, the author was pointing out to capitalism and how open these Africans were to the outside world for global trade and global economy. Therefore, the author is inferring to the inferiority of the African race due to lack of civilization because they had not allowed themselves to the outside world where they could exchange ideas and information that would aid in advancing their race. However, in module 2 concept 1 lecture notes, we learnt that all human beings have the capability of understanding the natural laws that govern the various races in terms of mental faculties, and thus the aspect of one race being superior to another was just a biased assumption.
From the Boazii University (01), endemic reform is the process of Asian, Africans, Middle Eastern, and Pacific states people building their own modernity. The aspect of capitalism and global economy had an immense impact on the endemic reforms throughout the globe. The sarcasm depicted in the lecture notes is when it is said that the endemic reform started when the Europeans showed up with the aim of enlightening the people yet they were carrying guns (module 2, concept 3, Endemic reform). By carrying guns, it means that they wanted to continue their control of the global economy and force these native communities to adopt to their culture, religion, and capitalist way of life since they termed themselves to be superior to these native races.

References

Required readings

Boazii University. The Edict of Glhane (1839). Atatrk Institute of Modern Turkish History.
Josiah Clark Nott, Types of Mankind (1854), Philadelphia: Lippincott, Grambo & Co.
Lin, C. Letter to Queen Victoria. Modern History Sourcebook: Moral Advice to Queen Victoria (1839)

Class lecture notes

Module 2, Concept 2, Case Study 2. EastAsia. Drugs And The Attempted Colonization Of China.
Module 2, Concept 1. Conceptual Lecture: Race

Module 2 concept 3, Endemic reform 1 Variable Definition
The definitions, specific meanings and symbols of variables studied in this paper are shown in the following table.
Meaning of table x variables

category

symbol

meaning

Depth

GFDD.DI.02

Deposit money banks’ assets to GDP (%)

Stability

GFDD.SI.01

Bank Z-score

Other Economic

GFDD.OE.01

Consumer price index (2010=100, December)

Access

GFDD.AI.03

Firms with a bank loan or line of credit (%)

Access

GFDD.AI.20

Credit card (% age 15+)

Access

GFDD.AI.23

Mobile phone used to pay bills (% age 15+)

Access

GFDD.AI.34

Investments financed by banks (%)

Access

GFDD.AI.35

Working capital financed by banks (%)

Access

GFDD.AM.04

Investments financed by equity or stock sales (%)

2 Descriptive Statistics of Variables
Table X Descriptive Statistics

Variable

Mean

Std.Dev.

Min

Max

gfdddi02

60.63444

43.98217

0.392568

257.224

gfddsi01

14.01161

9.067189

-0.451923

64.4264

gfddoe01

125.9714

152.6162

94.5781

4665.79

gfddai03

34.21103

17.61162

3.8

79.6

gfddai20

17.84324

20.16423

0

82.5848

gfddai23

4.326267

5.93272

0

37.1049

gfddai34

14.8875

8.954845

0.8

38.5

gfddai35

11.59926

6.279308

0.8

30.1

gfddam04

4.616667

3.429408

0

15.4

It can be seen from the above table that the standard deviation of the consumer price index is the largest among all variables, which indicates that the consumer price index of different banks has a great variation range, with a value of 152.6162.According to the dependent variable, deposit money banks’ assets to GDP, the maximum value is 257.224, the minimum, 0.392568, the standard deviation, 43.98217, and the average, 60.63444. With respect to the variable Bank Z-score, its maximum value is 64.4264, the minimum, -0.451923, the standard deviation, 9.067189, and the average, 14.01161.
3 Correlation analysis of variables
In order to study the factors that affect the performance of banks, the variables are selected from access, depth, efficiency, other, other economic and stability. Before the formal regression analysis, the correlation analysis was carried out to explore the correlation between independent variables and the linear correlation between explanatory variables and independent variables. The results are shown in the following table. Comment by TYT: other, other economicother Comment by TYT:
Correlation analysis mainly studies the correlation between variables. The range of correlation coefficient is between-1 and 1. The larger the absolute value, the closer the correlation between variables is. Qiu Haozheng (2006) put forward a detailed classification method of correlation coefficient, r=1, which is completely correlated;r0.70 <0.99, highly correlated;0.40 r<0.69, moderately correlated;0.10r<0.39, low correlation;r< 0.10, weak or irrelevant. Generally, correlation analysis is needed before regression analysis to preliminarily judge the relationship between explanatory variables and interpreted variables. Therefore, pearson correlation analysis is used to analyze the linear correlation between variables. The specific results are shown in Table 2. It can be seen from the above table that most of the correlation coefficients between independent variables are less than 0.5, indicating that the correlation degree between independent variables is small, and the correlation coefficients between dependent variables and independent variables are only individually greater than 0.5, so we should explore the causal relationship between independent variables and dependent variables through regression analysis. Table X Correlation Analysis Table 1 gfdddi02 gfddoe01 gfddai03 gfddai20 gfddai23 gfddai34 gfddai35 gfddam04 gfdddi02 1 gfddoe01 -0.2059 1 gfddai03 0.4155 -0.4226 1 gfddai20 0.8827 -0.2007 0.3735 1 gfddai23 0.7977 -0.2151 0.4077 0.9556 1 gfddai34 0.3473 -0.2402 0.6735 0.1696 0.261 1 gfddai35 0.2802 -0.3179 0.8555 0.1077 0.1196 0.7283 1 gfddam04 -0.2372 0.0276 -0.1422 -0.2234 -0.4136 -0.3086 -0.0694 1 Table X Correlation Analysis Table 2 gfddsi01 gfddoe01 gfddai03 gfddai20 gfddai23 gfddai34 gfddai35 gfddam04 gfddsi01 1 gfddoe01 0.1032 1 gfddai03 0.7779 -0.4219 1 gfddai20 0.0181 -0.1988 0.3547 1 gfddai23 0.8177 -0.2196 0.4216 0.9452 1 gfddai34 -0.0528 -0.2378 0.6428 0.1705 0.2547 1 gfddai35 0.2082 -0.3195 0.8652 0.0954 0.1474 0.688 1 gfddam04 0.1769 0.0241 -0.1212 -0.2246 -0.4021 -0.3101 -0.0481 1 4 regression analysis 4.1 regression analysis In order to explore the specific influence relationship, the following regression model was constructed. gfdddi02 Coef. robust.std.err t P>|t|

[95% Conf.Interval

gfddoe01

-0.0174635

0.0857947

-0.2

0.847

-0.2380057

0.2030787

gfddai03

-0.4269511

0.8353712

-0.51

0.631

-2.574341

1.720439

gfddai20

6.339178

1.794365

3.53

0.017

1.726615

10.95174

gfddai23

-20.99733

10.40286

-2.02

0.01

-47.73873

5.744067

gfddai34

0.9361124

0.7217221

1.3

0.251

-0.9191335

2.791358

gfddai35

0.6808618

1.724007

0.39

0.709

-3.750839

5.112562

gfddam04

-2.124557

1.569369

-1.35

0.234

-6.158748

1.909633

_cons

36.9883

20.51093

1.8

0.31

-15.73672

89.71331

F(7, 5) = 7.90

Prob>F=0

R-squared = 0.9171

Adj R-squared = 0.8011

Root MSE = 16.011

The R square of the model is 0.9171, and the adjusted r square is 0.8011, indicating that the independent variable can explain 80.11% of the dependent variable, and the model fitting effect is very good. And the statistical value of f is 7.9, and the test result of f test is significant, that is, at least one independent variable has significant influence on the dependent variable, and the model is meaningful.
In addition, in the t test of regression coefficient, because the p values of credit card and mobile phone used to pay bills are less than 0.05, the regression coefficients of credit card and mobile phone used to pay bills have passed the significance test, which shows that they have significant influence on the dependent variable.
The regression equation obtained is
Y=36.9883+gfddoe01*-0.0174635+gfddai03*-0.4269511+gfddai20*6.339178+gfddai23*-20.99733+gfddai34*0.9361124+gfddai35*0.6808618+gfddam04*-2.124557
4.2 Robustness analysis
To test the robustness of the above model, the dependent variable is replaced by Bank Z-score from Deposit money banks’ assets to GDP, and the regression results are as follows. It can be seen from the table that the p value of credit card and mobile phone used to pay bills is still less than 0.05 in the equation, which indicates that credit card and mobile phone used to pay bills have significant influence on the dependent variable, and the robustness of the model has been verified.

gfddsi01

Coef.

robust.std.err

t

P>|t|

[95% Conf.Interval

gfddoe01

0.0175336

0.0358044

0.49

0.642

-0.0700767

0.1051439

gfddai03

-0.4530194

0.3455447

-1.31

0.238

-1.298537

0.3924981

gfddai20

-1.096349

0.588331

-1.86

0.012

-2.535943

0.3432448

gfddai23

7.385612

3.372901

2.19

0.071

-0.86758

15.6388

gfddai34

-0.2145848

0.2747104

-0.78

0.464

-0.8867769

0.4576072

gfddai35

1.107059

0.6637819

1.67

0.146

-0.5171564

2.731275

gfddam04

0.9514052

0.6042903

1.57

0.166

-0.52724

2.43005

_cons

1.895037

8.14141

0.23

0.824

-18.02628

21.81635

F(7, 6) = 1.06

Prob>F= 0.0185

R-squared = 0.5525

Adj R-squared = 0.0304

Root MSE = 6.6972 Journal of Financial Economics 65 (2002) 337363

Funding growth in bank-based and market-based
financial systems: evidence from firm-level data$

Asl Demirg.u-c-Kunt
a, Vojislav Maksimovicb,*

aThe World Bank, 1818 H St. N.W., Washington, DC 20433, USA
bRobert. H. Smith School of Business, University of Maryland, Van Munching Hall, College Park,

MD 20742, USA

Received 24 July 2000; accepted 22 June 2001

Abstract

We investigate whether firms access to external financing to fund growth differs in market-
based and bank-based financial systems. Using firm-level data for 40 countries, we compute
the proportion of firms in each country relying on external finance and examine how that
proportion differs across financial systems. We find that the development of a countrys legal
system predicts access to external finance, and stock markets and the banking system affect
access to external finance differently. However, we find no evidence that firms access to
external financing is predicted by several proxies for relative development of stock markets to
the development of the banking system. r 2002 Elsevier Science B.V. All rights reserved.

JEL classificaion: G21; G30; K20

Keywords: Financial system; Firm growth; Law; Financial institutions

1. Introduction

A key question in development economics is the relation between a countrys
financial system and its economic development. Historians such as Gerschenkron
(1962) have sought to explain a perceived relation between the differences in the

$We would like to thank Ross Levine and Thorsten Beck for useful discussions. The views expressed
here are the authors own and not necessarily those of the World Bank or its member countries.
*Corresponding author. Tel.: +1-301-405-2125; fax: +1-301-314-9157.
E-mail addresses: [emailprotected] (A. Demirg.u-c-Kunt), [emailprotected]

(V. Maksimovic).

0304-405X/02/$ – see front matter r 2002 Elsevier Science B.V. All rights reserved.
PII: S 0 3 0 4 – 4 0 5 X ( 0 2 ) 0 0 1 4 5 – 9

pattern of economic development between Britain and the Continental European
economies and the differences between bank-based and market-based financial
systems. More recently, the differences in the relative performance of the Japanese
and the US economies have led observers to conclude that bank-based and market-
based financial systems may produce different growth patterns.1 La Porta et al.
(1997, 1998) challenge this view, and argue that a countrys legal system is a primary
determinant of the effectiveness of its financial system. This hypothesis implies that
the distinction between market-based and bank-based financial systems is not
primarily important for policy.

In this paper we use firm-level data from a panel of 40 countries to analyze how a
countrys legal and financial systems affect firms access to external finance to fund
growth. For each country we predict a financial system based on the countrys legal
environment. We use our estimates to ask: Does the financial system have an effect
independent of the legal system? Is the use of external financing different in market-
based and bank-based systems? Do the market-based and bank-based systems differ
in the provision of long-term and short-term funds?

We find that the use of external financing by firms is positively related to the
development of both the predicted banking system and the securities markets in each
country. However, in our sample we do not find evidence that variations in the
development of the financial system that are unrelated to the legal system affect
access to external finance. In particular, we find no evidence that firms use external
financing differently if they are in countries classified as bank-based or market-
based, on the basis of the development of their banking sector relative to their
securities markets.

These results are consistent with the LLSV (1998) approach that stresses the
primacy of the legal system. The policy implication that flows from the results is that
the way to improve access to external finance is to aid in the development of a
countrys legal system, and then to let firms and investors contract either directly (as
in a market-based system) or through the intermediation of banks.

We also find that securities markets and bank development have a different effect
on the type of external finance firms obtain, particularly at relatively low levels of
financial development. In those countries where the legal contracting environment
predicts a high level of development for securities markets, more firms grow at rates
requiring long-term external finance. We do not find the same effect for predicted
bank development. Thus, especially for countries with lower levels of financial
development, differences in contracting environments that affect the relative
development of the stock market and the banking system can have implications
for which firms and projects obtain financing.

There exists a growing literature on the effect of financial sector development on
economic development. King and Levine (1993a, b) highlight the importance of
financial development for macroeconomic growth. Recently Levine and Zervos

1For a critical examination of the effect of the legal and market environment on corporate finance see
Stulz (1999). Allen (1993) and Allen and Gale (1999) provide analyses of the relative benefits of market-
based and bank-based financial systems.

A. Demirg.u-c-Kunt, V. Maksimovic / Journal of Financial Economics 65 (2002) 337363338

(1998), Rajan and Zingales (1998), and Demirg.u-c-Kunt and Maksimovic (1998)
explore the relation between financial development and growth of countries,
industries and firms, respectively. Wurgler (2000) provides an analysis of capital
allocation efficiency in a sample of countries.

The importance of the legal system for corporate finance was first explored by
LLSV (1998). Modigliani and Perotti (1999) argue that in the absence of a strong
legal system that can protect the rights of external investors, financial transactions
are intermediated through institutions or concentrated among agents who have
sufficient bargaining power to enforce their rights privately. Demirg.u-c-Kunt and
Maksimovic (1996) and Booth et al. (2001) examine whether theories advanced to
explain firms capital structures in developed countries can explain financing choices
in countries with less developed financial markets. Empirical evidence on the effect of
legal effectiveness on firm growth and financing is provided by Demirg.u-c-Kunt and
Maksimovic (1998, 1999, 2001), and on growth at more aggregated levels by Beck
et al. (2000) and Levine (2000). This paper extends the methodology of Demirg.u-c-
Kunt and Maksimovic (1998) to address differences in bank-based and market-based
systems in firm growth.

The rest of the paper is organized as follows. Section 2 briefly discusses reasons
that bank-based and market-based systems perform differently and our approach to
testing those differences empirically. Section 3 introduces the data and summary
statistics. Our principal results are reported in Section 4 and Section 5 concludes.

2. Bank-based and market-based financial systems

A financial systems major tasks include mobilizing resources for investment,
selecting investment projects to be funded, and providing incentives for the
monitoring of the performance of the funded investments. A large body of
theoretical and empirical research analyzes how these tasks are performed in a
market-based system, and how they are performed in a system where banks and
other financial intermediaries play a major role. This research identifies significant
differences in incentives to monitor firms. These differences raise the possibility that
a bank-based or a market-based system is inherently superior and that economic
performance can be enhanced by adopting the superior system.

A second approach, identified by LLSV (1998), stresses the importance of the legal
system in determining the enforceable contracts between firms and investors.
According to this view, the relevant differences between countries is in the extent to
which their financial systems protect investor rights. The distinction between bank-
based and market-based systems is seen as secondary.

In our examination of the differences between bank-based and market-based
financial systems we adopt a hypothesis that has elements of both these approaches.
We posit that there exist significant differences in outcomes between systems in
which financial intermediaries (like banks) play the dominant role and those where
they do not. For example, as explored by Allen and Gale (1999), banks and stock
markets can have a comparative advantage in selecting different types of investment

A. Demirg.u-c-Kunt, V. Maksimovic / Journal of Financial Economics 65 (2002) 337363 339

projects. Banks can also have a comparative advantage in providing short-term
financing.

In common with the legal approach, we posit that the absolute quality of the
banks and securities markets in a country depends on the legal systems ability to
enforce contracts. However, we argue that the legal systems in different countries can
have a comparative advantage in supporting a quality banking system or quality
securities markets. Thus, for example, a country with an inefficient legal system can
have a low-quality financial system. However, a country can, through a combination
of administrative regulation of the banking system and strong banks with bargaining
power vis-“a-vis their customers, partially compensate for the effect of the deficiency
of the legal system on banks. It can be more difficult to compensate for the effect of
poor legal protections on securities markets. Thus, while the level of development of
a countrys legal system can determine the quantity of financial services supplied, the
comparative advantage in supporting intermediaries and markets determines the
optimal mix of banks versus markets.

These considerations suggest the following hypotheses:

H1. For each country there is a warranted level of development of the banking
sector and of stock markets, as a function of the level of development of the
contracting environment. The provision of external financing to firms is greater, the
higher the warranted level of development of these sectors.

H2. The expansion of one of the sectors, banks or securities markets beyond the
levels warranted by the contracting environment, is unlikely to produce an improved
allocation of resources.

H3. Because the banking system and securities markets have a comparative
advantage in providing different services, cross-country differences in the warranted
development levels of markets and banking sectors affects the type of financial
constraints faced by firms.

2.1. Testing for differences in performance between the systems

Differences between outcomes in market-based and bank-based systems should, if
they exist, be observable at the country, industry, or firm levels. In principle, a test
would relate a performance measure, usually the growth rate, to the financial system
or legal system characteristics. While this results in straightforward applications at
the country level, there exists a potential selection bias when this procedure is applied
at lower levels of aggregation, such as the industry and firm levels.

The selection bias arises because the way in which production is organized in
different countries depends on their legal and financial systems. Thus, the firms
observed are adapted to the financial system of that country. Analyzing growth rates
of those firms does not take into account the possibility that a different financial
system might induce a different mix of firms and that the different mix might increase
wealth.

To fix ideas, consider an example involving two countries, B and M. Country B
has a bank-based financial system (perhaps because its legal system favors that type

A. Demirg.u-c-Kunt, V. Maksimovic / Journal of Financial Economics 65 (2002) 337363340

of contracting). Country M has a market-based system. Assume that the two
financial systems have different comparative advantages in supplying financing. In
particular, assume that market-based systems are superior at providing long-term
financing. Consider entrepreneurs in each country starting firms in the same
industry. Entrepreneurs in country M have a greater choice of technology and
organizational forms since they have greater access to long-term financing. As a
result, economy M is better off. However, once the initial investment is made, each
individual firm, and the industry as a whole, can grow at the same rate in country B
and in country M. Indeed, firms in country B may grow faster because they can
switch to a superior technology as they accumulate enough funds over time to self-
finance its acquisition. In this case, a comparison of firm or industry growth rates
across countries may not identify the benefits of a market-based financial system.

An alternative approach, developed in Demirg.u-c-Kunt and Maksimovic (1998), is
to test for differences between financial systems by testing whether the proportion of
firms growing at rates that exceed the rate that they can self-finance, or finance using
short-term instruments only, differs across different financial or legal systems. This
approach would identify the financial system in economy M above as being superior.
This is the approach we employ below, using firm-specific data to determine whether
each firm in the sample is constrained.

While the use of firm-specific data brings advantages, it also entails two potential
costs. First, the firms for which data is available are likely to be a relatively small
number of the largest publicly traded firms in each economy. While such firms are of
independent interest Beck et al. (2001) show that the financial and legal constraints
they face are not fully representative of firms in the economy. However, industry-
level data can suffer from the opposite bias: many of the firms included in industry
statistics are very small and would not qualify for significant external financing under
any financial system. Second, as discussed by Ball et al. (2000), the quality of firm-
level financial data differs across countries. Thus, the findings of firm-level and
industry-level studies need to be assessed jointly.

3. Data and summary statistics

The firm-level data consist of financial statements for the largest publicly traded
manufacturing firms in 40 countries (SIC codes 2000-3999). Our sample of firms
contains 45,598 annual observations over the period 19891996. The sample is from
Worldscope and contains data from both developed and developing countries as
listed in the appendix. For each of the countries we also use data on financial-system
development compiled by Beck et al. (1999).

In Table 1 we present pertinent facts about the level of economic and institutional
development in the sample countries. The countries are arranged from highest to
lowest average per capita Gross Domestic Product (RGDPPC) in 1990 dollars. They
range from Switzerland, with a per capita income of $26,972 to Pakistan, with a per
capita income of $319. As an indicator of the ability of firms to enter into financial
contracts, we use a commercial index of experts evaluations of the states efficiency

A. Demirg.u-c-Kunt, V. Maksimovic / Journal of Financial Economics 65 (2002) 337363 341

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