Financial and Legal Constraints to Growth: Does Firm Size Matter?

Authors

  • THORSTEN BECK,

    1. 1World Bank
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  • ASLI DEMIRGÜÇ-KUNT,

    1. 1World Bank
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  • VOJISLAV MAKSIMOVIC

    1. 2Robert H. Smith School of Business at the University of Maryland
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    • Beck and Demirgüç-Kunt are at the World Bank. Maksimovic is at the Robert H. Smith School of Business at the University of Maryland.This paper's findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank, its executive directors, or the countries they represent. We would like to thank Jerry Caprio, George Clarke, Simeon Djankov, Jack Glen, Richard Green, the editor, Luc Laeven, Florencio Lopez-de- Silanez, Inessa Love, Maria Soledad Martinez Peria, Raghuram Rajan, and seminar participants at the World Bank, American University, Case Western Reserve, Georgetown University, Oxford University, the University of Minnesota and Yale University, and an anonymous referee for helpful comments


ABSTRACT

Using a unique firm-level survey database covering 54 countries, we investigate the effect of financial, legal, and corruption problems on firms' growth rates. Whether these factors constrain growth depends on firm size. It is consistently the smallest firms that are most constrained. Financial and institutional development weakens the constraining effects of financial, legal, and corruption obstacles and it is again the small firms that benefit the most. There is only a weak relation between firms' perception of the quality of the courts in their country and firm growth. We also provide evidence that the corruption of bank officials constrains firm growth.

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