Adjustment to Target Capital, Finance and Growth

Antonio Ciccone and Elias Papaioannou

No 5969, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Does financial development result in capital being reallocated more rapidly to industries where it is most productive? We argue that if this was the case, financially developed countries should see faster growth in industries with investment opportunities due to global demand and productivity shifts. Testing this cross-industry cross-country growth implication requires proxies for (latent) global industry investment opportunities. We show that tests relying only on data from specific (benchmark) countries may yield spurious evidence for or against the hypothesis. We therefore develop an alternative approach that combines benchmark-country proxies with a proxy that does not reflect opportunities specific to a country or level of financial development. Our empirical results yield clear support for the capital reallocation hypothesis.

Keywords: financial development; growth; investment opportunities; measurement error; sector analysis (search for similar items in EconPapers)
JEL-codes: E23 E44 F30 G10 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-fdg and nep-mac
Date: Written
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Working Paper: Adjustment to Target Capital, Finance, and Growth (2006)
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