Law, Finance, and Firm Growth


  • Asli Demirgüç-Kunt,

    1. World Bank
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  • Vojislav Maksimovic

    1. Robert H. Smith School of Business, University of Maryland
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    • Demirgüç-Kunt is at the World Bank and Maksimovic is at the Robert H. Smith School of Business at the University of Maryland. We thank René Stulz, the editor, Jerry Caprio, Murray Frank, Ross Levine, Mary Shirley, Fabio Schiantarelli, Sheridan Titman, Ian Tonks, and the participants of the June 1996 World Bank Conference on Term Financing for their comments. The views expressed here are the authors' own and not necessarily those of the World Bank or its member countries.


We investigate how differences in legal and financial systems affect firms' use of external financing to fund growth. We show that in countries whose legal systems score high on an efficiency index, a greater proportion of firms use long-term external financing. An active, though not necessarily large, stock market and a large banking sector are also associated with externally financed firm growth. The increased reliance on external financing occurs in part because established firms in countries with well-functioning institutions have lower profit rates. Government subsidies to industry do not increase the proportion of firms relying on external financing.