Working Paper: NBER ID: w9582
Authors: Raymond Fisman; Inessa Love
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.'
Keywords: No keywords provided
JEL Codes: G15; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial Development (O16) | Actual Growth (O49) |
| Financial Development (O16) | Financing Constraints (G32) |
| Financing Constraints (G32) | Actual Growth (O49) |
| Financial Market Development (O16) | Responsiveness of Firms to Global Growth Opportunities (F23) |
| Global Growth Opportunities (F01) | Actual Growth (O49) |
| Financial Dependence (G59) | Actual Growth (O49) |