Financial Development And Allocation Of External Finance
Source: Charles University
The authors examine whether financial systems facilitate efficient allocation of resources into perspective projects. Employing European micro-level data from 1996-2005, they show that firms in industries with the best growth opportunities use more external finance in financially more developed countries. The result is robust to controlling for technology determinants of external finance and to choosing different proxies for growth opportunities. They also find that the explanatory power of the technology determinants decreases significantly once growth opportunities are controlled for, which suggests that the often used measures of determinants of external finance are partly driven by growth opportunities.