FINANCING PATTERNS AROUND THE WORLD: THE ROLE OF INSTITUTIONS

1
FINANCING PATTERNS AROUND THE WORLD THE ROLE OF
INSTITUTIONS

• BY Thortsten Beck, Asli Demirguc-Kunt and
  Vojislav Maksimovic
• Presented by
• Wisdom Ejebuagha and Luke Emeka Okafor
• Development Workshop 2008

2
OUTLINE

• INTRODUCTION
• MOTIVATION AND METHODOLOGY
• THE EMPIRICAL MODEL
• RESULTS
• APPRAISAL
• CONCLUSIONS

3
INTRODUCTION

• Influence of differences in financial and legal
  development versus investment options available
  to firms
• Relationship between broad spectrum of external
  financing sources and countrys financial and
  legal institutions
• Pecking order of financing hypothesis
• Influence firm size, access to external financing
  and institutional settings

4
MOTIVATION AND METHODOLOGY

• Limitations of existing studies
• Linear statistical models
• Narrow view of external financing
• Unrepresentative sample
• Heckmans two stage was applied

5
THE EMPIRICAL MODEL

• Financing dummy a ß Firm Characteristics ?
  Macroeconomic factors d Institutional factors
  e
• Financing proportion a ß Firm Characteristics
  ? Macroeconomic factors d Institutional
  factors e

6
RESULTS

• Institutional factors are uncorrelated with
  external financing, but, the form of external
  finance is
• The use of external finance is more common in
  countries with common law legal origin
• In countries with better developed institutions,
  firms are more likely to access other financing
  sources less in equity finance

7
RESULTS CONTD

• In countries with better developed legal systems
  firms are less likely to choose operations
  finance
• Firms which report greater financing obstacles
  are more prone to use external finance
• In countries with well developed financial
  institutions, firms use a smaller proportion of
  equity finance

8
RESULTS CONTD

• In high income countries, firms are more likely
  to issue equity
• Smaller firms are less likely to use external
  finance than large firms
• Pecking order theory holds for large firms in
  countries with well developed financial systems

9
APPRAISAL

• The validity of the indicators used to proxy for
  institutional developments
• Financial development may at least in short run
  be an impediment to external finance
• Influence of managerial education, quality,
  experience and societal norms at firm level

10
APPRAISAL CONTD

• Influence of level of adult literacy at country
  level
• Small firms that face lower financing obstacles
  are more likely to issue equity
• Firm size categorization

11
CONCLUSIONS

• The differences in firm financing patterns around
  the world
• The form of external finance is predicted by
  institutional development
• Firm size is a key determinant of access to
  external finance
• Determinants of optimal firm size deserves a
  close scrutiny

12

• Thank you for your attentive attention