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Financial development and dynamic investment behavior : evidence from panel vector autoregression, Volume 1
Author:Love, Inessa; Zicchino, Lea; Date Stored:2002/11/11
Document Date:2002/10/31Document Type:Policy Research Working Paper
SubTopics:Economic Theory & Research; Financial Intermediation; International Terrorism & Counterterrorism; ICT Policy and Strategies; Environmental Economics & PoliciesLanguage:English
Report Number:WPS2913Sub Sectors:General finance sector
Collection Title:Policy, Research working paper series ; no. WPS 2913Volume No:1
Related Dataset:Panel VAR (vector autoregression);   

Summary: The authors apply vector autoregression to firm-level panel data from 36 countries to study the dynamic relationship between firms' financial conditions and investment. They argue that by using orthogonalized impulse-response functions they are able to separate the "fundamental factors" (such as marginal profitability of investment) from the "financial factors" (such as availability of internal finance) that influence the level of investment. The authors find that the impact of the financial factors on investment, which they interpret as evidence of financing constraints, is significantly larger in countries with less developed financial systems. The finding emphasizes the role of financial development in improving capital allocation and growth.

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