Financial development, legal systems and SME finance: Cross-country evidence

Hongzhi Wang, Xin Xiang and Liang Han

International Review of Economics & Finance, 2023, vol. 88, issue C, 981-1002

Abstract: This paper provides a comprehensive investigation into the selection of different sources of finance for both short-term and long-term projects by SMEs, utilizing cross-country data from the World Bank. The results highlight the crucial roles played by financial development and legal system in the countries where SMEs operate. Specifically, with better developed financial systems, SMEs are more likely to use formal sources of external finance from formal sources (e.g., bank and non-bank institutions) to meet their short term and long term financing needs, highlighting the importance of financial development in accessing external finance for SMEs. Furthermore, this paper provides evidence on the moderating effects of legal systems on the favourable impacts of financial development on SME finance. In particular, the effects of financial development on SMEs’ access to external finance are more pronounced in countries with stronger investor protection, such as common law countries, than in those civil law countries, highlighting the importance of legal syystems in facilitating SME financing and suggests that policymarkers should consider strengthening investor protection on promote SME growth and development.

Keywords: Financial development; SME finance; Bank and non-bank financial institutions; Legal system; Short term finance; Long term finance (search for similar items in EconPapers)
JEL-codes: F65 G01 G21 G23 G31 K15 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:88:y:2023:i:c:p:981-1002

DOI: 10.1016/j.iref.2023.07.021

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