Unbundling institutions for external finance: Worldwide firm-level evidence

Stephen Knack and Lixin Xu

Journal of Corporate Finance, 2017, vol. 44, issue C, 215-232

Abstract: The literature on institutions has been challenged on grounds of reverse causality, measurement error in institutional indicators, and heterogeneity. This paper uses firm-level data across countries to confront these challenges. We focus on the effect on firm-level external finance, and “unbundle” institutions in the sense of Acemoglu and Johnson (2005), while addressing the largely-ignored issue of measurement error in institutional indicators. We find that contracting institutions that facilitate transactions between private parties exert little effect on firms' access to external finance. In contrast, property rights institutions that constrain political and economic elites exhibit a strong positive association with access to external finance. Interestingly, the association between property rights institutions and external finance tends to be stronger for working capital than for investment. Our results suggest that an important channel for institutions and especially property right institutions to affect development is through access to external finance.

Keywords: Access to finance; Unbundling institutions; Contracting institutions; Property rights institutions; Firm size (search for similar items in EconPapers)
JEL-codes: G20 G30 G38 K20 K40 O10 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Working Paper: Unbundling institutions for external finance: worldwide firm-level evidence (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:44:y:2017:i:c:p:215-232

DOI: 10.1016/j.jcorpfin.2017.02.003

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