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 country’s 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 • Heckman’s two stage was applied

5. THE EMPIRICAL MODEL • Financing dummy = α + β Firm Characteristics + ? Macroeconomic factors + d Institutional factors + ε • Financing proportion = α + β Firm Characteristics + ? Macroeconomic factors + d Institutional factors + ε

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