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Financial Development and Intersectoral Allocation: A New Approach




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    • Raymond Fisman is at Columbia University and Inessa Love is at the World Bank. We thank Raghuram Rajan and Luigi Zingales, as well as Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer for kindly allowing us the use of their data. We are also extremely grateful to Bill Simpson for providing his QAP STATA subroutine. Finally, we thank the editor, an anonymous referee, Thorsten Beck, Asli Demirgüç-Kunt, Ann Harrison, Charles Himmelberg, Tarun Khanna, Andrei Kirilenko, Luc Laeven, Sendhil Mullainathan, Enrico Perotti, Jan Rivkin, and Luigi Zingales for extremely helpful conversations and advice.


This paper uses a new methodology based on industry comovement to examine the role of financial market development in intersectoral allocation. Based on the assumption that there exist common global shocks to growth opportunities, we hypothesize that country pairs should have correlated patterns of sectoral growth if they are able to respond to these shocks. Consistent with financial markets promoting responsiveness to shocks, countries have more highly correlated growth rates across sectors when both countries have well-developed financial markets. This effect is stronger between country pairs at similar levels of economic development, which are more likely to experience similar growth shocks.