Law, Finance, and Firm Growth

TLDR

The study examines how variations in legal and financial systems influence firms’ use of external financing for growth. Countries with efficient legal systems, active stock markets, and large banking sectors see higher use of long‑term external financing, partly because established firms have lower profit rates, while government subsidies do not affect financing reliance.

Abstract

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.