Working Paper: CEPR ID: DP3295
Authors: Stijn Claessens; Luc Laeven
Abstract: This Paper investigates how the legal framework not only affects the amount of external financing available, but also firms? resource allocation among different types of assets. Using a simple model, we show that in a weaker legal environment a firm will get less financing, and thus invest less, but also invest less in intangible assets. Empirically, these two effects appear to be equally important drivers of growth in sectoral value added for a large number of countries and using a number of robustness tests. Using individual firm data, we find further supporting evidence as weaker legal frameworks are associated with relatively more fixed assets, but less long-term financing for a given amount of fixed assets.
Keywords: economic growth; financial development; intangible assets; property rights
JEL Codes: G31; G32; O34; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| weaker property rights (P14) | lower firm growth (D25) |
| weaker property rights (P14) | lower availability of external financing (G32) |
| lower availability of external financing (G32) | lower investment capacity (G31) |
| weaker property rights (P14) | higher allocation to fixed assets (G31) |
| higher allocation to fixed assets (G31) | lower allocation to intangible assets (G31) |
| lower allocation to intangible assets (G31) | lower firm growth (D25) |
| weaker property rights (P14) | lower investment in intangible assets (G31) |