The role of long term finance : theory and evidence

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The role of long term finance : theory and evidence, Volume 1

Author:	Caprio Jr., Gerard; Demirguc-Kunt, Asli;	Collection Title:	Policy, Research working paper ; no. WPS 1746
Date Stored:	2001/04/21	Document Date:	1997/04/30
Document Type:	Policy Research Working Paper	Language:	English
Major Sector:	(Historic)Private Sector Development	Report Number:	WPS1746
Sub Sectors:	Business Environment	SubTopics:	Environmental Economics & Policies; Payment Systems & Infrastructure; Economic Theory & Research; Banks & Banking Reform; Strategic Debt Management; Financial Intermediation
Volume No:	1

Summary: The authors review the literature on term finance to place the research in context and discuss its implications for World Bank operations. Their project investigated whether industrial firms in developing countries suffer from a shortage of long-term credit and whether that shortage affects the firm's investment, productivity, and growth. Both issues are important in designing the World Bank's industrial lending policy because the development community is reevaluating mechanisms to make more term finance available or to lessen the constraints imposed by its absence. Using both cross-country empirical analysis and country case studies, researchers found that developing country firms use significantly less long-term debt than their industrial country counterparts, even after controlling for firm characteristics. They explain the difference in debt composition of industrial and developing countries in terms of firm characteristics, macro factors, and -most important- government subsidies, the country's level of financial development, and legal and institutional factors. They conclude that more long-term finance tends to be associated with higher productivity. Cross-country analysis of firm-level data also indicates that when there is an active stock market and when creditors and debtors are better able to enter into long-term contracts, firms seem to be able to grow faster than they could by relying only on internal resources and short-term credit. Another important finding: Government subsidies around the world have increased firms' long-term indebtedness, but there is no evidence connecting these subsidies with the firms's ability to grow faster. Indeed, in some cases subsidies were asociated with lower productivity.


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	PDF 38 pages	Official version*	2.66 (approx.)
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	PDF 31 pages	WPS1746	0.11

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