wrs
TE
POLICY
RESEARCH
WORKING
PAPER
2784
Financial
and
Legal
Constraints
to
Firm
Growth
Does
Size
Matter?
Thorsten
Beck
Aslh
Demirgfic-Kunt
Vojislav
Maksimovic
The
World
Bank
Development
Research
Group
Finance
February
2002
Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized
POLIcY
RESEARCH
WORKING
PAPER
2784
Abstract
Using
a
unique
firm-level survey
data
base
covering 54
promoting
firm
growth,
particularly
the development
of
countries,
Beck,
Demirgiu,-Kunt,
and
Maksimovic
the
small
and
medium enterprise
sector.
But
the
evidence
investigate
whether
different
financial,
legal,
and
also
shows
that
the intuitive
descriptors
of
an
"efficient"
corruption
issues
that
firms
report
as
constraints
actually
legal system
are
not
correlated with
the components
of
affect
their
growth
rates.
The
results
show
that
the
extent the
general
legal
constraints
that
predict
firm
growth.
to
which
these factors
constrain
a
firm's
growth
depends This finding
suggests
that
the
mechanism
by
which
the
very
much on
its
size
and
that
it
is
consistently
the
legal
systems affects
firm
performance
is
not
well
smallest
firms
that
are
most
adversely affected
by
all
understood.
The
authors'
findings
also
provide
evidence
three
constraints.
Firm
growth
is
more
affected
by
that
the
corruption
of
bank
officials
constrains
firm
reported
constraints
in
countries
with underdeveloped
growth.
This
"institutional
failure"
should
be
taken into
financial
and
legal
systems
and
higher
corruption.
So,
account when modeling
the
monitoring
role
of
financial
policy measures
to improve
financial
and
legal
institutions
in
overcoming
market
failures
due
to
development
and reduce
corruption
are
well
justified
in
informational
asymmetries.
This
paper-a
product
of
Finance,
Development
Research
Group-is
part
of
a
larger
effort
in
the
group to
understand
the
link
from
the
financial
sector to economic
development.
Copies
of the
paper
are available
free
from
the
World
Bank,
1818
H
Street
NW,
Washington,
DC
20433.
Please
contactAgnesYaptenco,
room
MC3-446, telephone
202-473-8526,
fax
202-
522-1155,
email
address
ayaptenco@worldbank.org.
Policy
Research
Working
Papers
are
also
posted
on
the
Web
at
http://econ.worldbank.org.
The
authors
may
be
contacted
at
tbeck@worldbank.org, ademirguckunt@worldbank.org,
or
vmaksimovic@rhsmith.umd.edu.
February
2002.
(52
pages)
The
Policy
Research
Working
Paper
Seres
disseminates the
endings
of
work
in
progress
to
encourage
the
exchange
of
ideas
about
development
issues.
An
objective
of
the
series
is
to
get
the
findings
otit
quickly,
even
if
the
presentations are
less
than
fully
polished.
The
papers
carry
the names
of
the
autbors
and
sbould
be
cited
accordingly.
The
findings,
interpretations,
and
conclusions
expressed
in
this
paper
are entirely
those
of
the
authors.
They do
not
necessarily
represent
the view
of
the
World
Bank,
its Executive
Directors,
or
the
countries
they represent.
Produced
by
the
Research Advisory
Staff
FINANCIAL
AND
LEGAL
CONSTRAINTS
TO
FIRM
GROWTH
DOES
SIZE MATTER?
Thorsten
Beck,
Asli
Demirgu,c-Kunt,
and
Vojislav
Maksimovic
Keywords:
Financial
Development; Financing
Constraints,
Small
and
Medium
Enterprises
JEL
Classification:
G30,
G10,
016,
K40
Beck
and
Demirgiiu-Kunt:
World
Bank;
Maksimovic:
Robert
H.
Smith
School
of
Business
at the
University
of
Maryland.
We
would
like
to
thank Jerry Caprio,
George
Clarke,
Simeon
Djankov, Luc
Laeven and
Inessa
Love
for
helpful
discussion.
1.
Introduction
Corporate
finance
literature
suggests that
market imperfections, such
as
those
caused
by
underdeveloped
financial
and legal
systems,
may
constrain
firrns
in
their
ability
to
fund
investment
projects.
The
magnitude
of
these
imperfections,
as
reflected
in
the
conflicts
of
interest and informational asymmetries
between
corporate
insiders
and
investors,
is
expected
to decrease
with
the
development
of
financial
and
legal
systems.
Demirguc-
Kunt
and
Maksimovic
(1998)
have stressed the
importance
of
the
financial
system
and
the rule
of
law
for
relaxing
firms'
external
financing
constraints
and facilitating
their
growth.'
While
their
results show
a
strong
effect,
their
conclusions
are
based
on
a
sample
of
the largest
firms
in
each
of
the
economies
they
study,
and
relies
on
inferring
firms'
demand
for
external
financing from
a
financial model
of
the
firm.
In
this
paper
we
examine the
constraints firms
face
using
a
size-stratified
sample
of
over
4,000
firms
in
54
countries,
and
measures
of
constraints firms
face
are
taken
directly
from
firms'
responses
to
a
detailed
survey.
Our
econometric
model
permits
us
to determine whether or
not
firm
growth
is
in
fact
affected
by
the
perceived
constraints, and
to
test
how
specific
constraints
affect different
types
of
firms.
There is
a
large
literature,
starting
with
LaPorta,
Lopez-de-Silanes,
Shleifer,
and
Vishny
(1998)
that
argues
that
a
country's
legal
and
financial
systems
is
a
significant,
perhaps
the
main
determinant
of
the financing
of
firms.
However,
a
priori
it
is
not
clear
which
aspects
of
financial
and
legal
development
are
the
most
significant
and
how
they
affect
firms
of
different
size.
For
example,
large
firms internalize many
of
the
capital
allocation
functions
carried
out by the
financial
markets
and
financial intermediaries.
To
'
Related
work, by
Rajan
and
Zingales (1998)
and
Wurgler
(2000)
on industry
growth,
and on
law
and
external
financing
by
LaPorta,
Lopez-de-Silanes,
Shleifer, and
Vishny (1997)
is
discussed
below.