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Financial and legal institutions and firm size

By: Beck, Thorsten.
Contributor(s): Demirguc-Kunt, Asli | Maksimovic, Vojislav.
Material type: materialTypeLabelBookSeries: Policy Research Working Paper, no. 2997. Publisher: Washington, D C World Bank 2003Description: 46 p.Subject(s): Financial institutions | Commercial policy | Big business Industries - SizeDDC classification: 332.1 Summary: The authors investigate how a country's financial institutions and the quality of its legal system explain the size attained by its largest industrial firms in a sample of 44 countries. Firm size is positively related to the size of the banking system and the efficiency of the legal system. Thus, the authors find no evidence that firms are larger in order to internalize the functions of the banking system or to compensate for the general inefficiency of the legal system. But they do find evidence that externally financed firms are smaller in countries that have strong creditor rights and efficient legal systems. This suggests that firms in countries with weak creditor protections are larger in order to internalize the protection of capital investment. https://openknowledge.worldbank.org/handle/10986/19157
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The authors investigate how a country's financial institutions and the quality of its legal system explain the size attained by its largest industrial firms in a sample of 44 countries. Firm size is positively related to the size of the banking system and the efficiency of the legal system. Thus, the authors find no evidence that firms are larger in order to internalize the functions of the banking system or to compensate for the general inefficiency of the legal system. But they do find evidence that externally financed firms are smaller in countries that have strong creditor rights and efficient legal systems. This suggests that firms in countries with weak creditor protections are larger in order to internalize the protection of capital investment.

https://openknowledge.worldbank.org/handle/10986/19157

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