Dependence on External Finance by Manufacturing Sector: Examining the Measure and its Properties

George von Furstenberg and Ulf von Kalckreuth

No 2007-001, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: Rajan & Zingales (1998) use U.S. Compustat firm data for the 1980s to obtain measures of manufacturing sectors’ Dependence on External Finance (DEF). They take any differences in these measures to be structural/technological and thus applicable to other countries. Their joint assumptions about how to obtain representative values of DEF by sector and about why these values differ between sectors have been used widely to show that sectors benefit unequally from a country’s level of financial development. However, the assumptions as such have not been examined. The present study, conducted with cyclically adjusted annual DEF measures, attempts to do so using U.S. industry data for 1977-1997 aggregated by sector. The key findings are that structural/ technological variables have low explanatory power for DEF and that the DEF figures calculated from micro data do not correspond closely to what is obtained from aggregate data. Hence assumptions crucial for RZ's argumentation have not been validated.

Keywords: Growth and finance; financial development; industry structure (search for similar items in EconPapers)
JEL-codes: E50 G20 G30 O14 O16 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2007-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Journal Article: Dependence on External Finance by Manufacturing Sector: Examining the Measure and its Properties (2007)
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