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Essays on the interaction between financial development and real economy.

Bena, Jan (2009) Essays on the interaction between financial development and real economy. PhD thesis, London School of Economics and Political Science (United Kingdom).

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Abstract

Economists disagree about the role of the financial sector in economic growth. My thesis contributes to this discussion. I show that better financial systems do promote productivity growth and that limited access to external finance interacts with product market competition in determining corporate investment. The first chapter "The Effect of Financial Development on Corporate Growth in the EU Single Market" compares within-industry growth rates of similar EU 'single-market' firms facing financial systems of different depth and institutional quality as of 'single-market' inception. Moving from the least to the most developed financial market within the EU boosts firms' annual value-added growth by about three percentage points. Our results also suggest that the growth gap due to initially under-developed financial systems wais closed by 2003. In the second chapter "Which Firms Benefit More from Financial Development." we test whether more developed financial systems foster corporate growth through tackling market frictions proxied by firm size and age. Our main finding is that more developed financial systems are able to overcome the relative opaqueness of younger firms. We also find that freshly incorporated firms in less financially developed countries have unusually high shares of equity capital in total assets. The two chapters provide evidence that limited access to external finance affects corporate structures and hinders economic growth. In the last chapter "The Effect of Credit Rationing on the Shape of the Competition-Innovation Relationship" I study how financial constraints affect innovation activity. The novel theoretical results derive from an analysis of the interaction between the incentive effect of competition on innovation and the effect competition has on the degree of credit rationing. I find that the negative effect of financial constraints on firm- and aggregate-level R&D investment is most pronounced at both high and low levels of competition. These predictions are supported by empirical evidence.

Item Type: Thesis (PhD)
Uncontrolled Keywords: Economics, Finance
Sets: Collections > ProQuest Etheses
Departments > Finance
URI: http://etheses.lse.ac.uk/id/eprint/3000

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