DP3295 Financial Development, Property Rights and Growth

Author(s): Stijn Claessens , Luc Laeven

Publication Date: April 2002

Keyword(s): economic growth , intangible assets , financial development , property rights

JEL(s): G31 , G32 , O34 , O40

Programme Areas: Financial Economics

Link to this Page: www.cepr.org/pubs/dps/DP3295.asp

This Paper investigates how the legal framework not only affects the amount of external financing available, but also firms’ resource allocation among different types of assets. Using a simple model, we show that in a weaker legal environment a firm will get less financing, and thus invest less, but also invest less in intangible assets. Empirically, these two effects appear to be equally important drivers of growth in sectoral value added for a large number of countries and using a number of robustness tests. Using individual firm data, we find further supporting evidence as weaker legal frameworks are associated with relatively more fixed assets, but less long-term financing for a given amount of fixed assets.