Financial Development and Financing Constraints: International Evidence from the Structural Investment Model

By Inessa Love. 2001

1,002 citations recorded by the source corpus.

This article provides evidence that financial development impacts growth by reducing financing constraints that would otherwise distort efficient allocation of investment. The financing constraints are inferred from the investment Euler equation by assuming that the firm's stochastic discount factor is a function of the firm's financial position (specifically, the stock of liquid assets). The magnitude of the changes in the cost of capital is twice as large in a country with a low level of financial development as in a country with an average level of financial development. The size effect, business cycles, and legal environment effects are also considered. Copyright 2003, Oxford University Press.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/a1e2e691da758e469862bb212abbbafc0ee7cdd7

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Citations in the corpus

On the Growth Effect of Stock Market Liberalizations (2009, neutral): “at the country level (Fisman and Love (2004); Bekaert, Harvey, Lundblad, and Siegel (2007)).”
Asset Pricing Implications of Firms' Financing Constraints (2006, methodology): “Specifically, Love (2003) shows that, under fairly general assumptions about technology, marginal profits are proportional to the sales-to-capital ratio.”
The Econometrics of Finance and Growth (2008, methodology): “Another methodology consists of assessing the relationship between country-level financial development and firms’ financing constraints derived from a structural investment model, such as the Euler equation (Love, 2003; Laeven, 2003).”
Financial and Legal Constraints to Growth: Does Firm Size Matter? (2005, background): “Love (2001) shows that the sensitivity of investment to cash flow depends negatively on financial development.”
The determinants of financing obstacles (2004, positive): “Love (2003) finds a strong negative relationship between the sensitivity of investment to the availability of internal funds and an indicator of financial market development, and concludes that financial development reduces the effect of financing constraints on investment.”
Financial credibility, ownership, and financing constraints in private firms (2011, neutral): “Finally, we use a firm-level measure of the perceived degree of corruption in the country (Corrupt).14 Since prior research shows that financing constraints vary across countries and industries (e.g., Love, 2003), we include both country and industry fixed effects.”
Fire-Sale Foreign Direct Investment and Liquidity Crises (2005, background): “Our third measure of liquidity is cash stock plus marketable securities, a proxy used frequently in the recent literature (see, for example, Love, 2003).18 15 One may consider such nonmanufacturing sectors as agriculture and natural resources to be tradable, but these sectors are a negligible…”
Financing patterns around the world : Are small firms different? (2008, neutral): “The importance of institutional development for investment is demonstrated by Wurgler (2000) and Love (2003), who show that the flow of capital to good investment projects increases with financial development.”