SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: This paper investigates the relationship between financial development and firm size. The model shows that the efficiency of the financial system, measured by the level of monitoring costs, affects the extent of risk sharing within an economy and through this channel the availability of external finance to growing firms. If the provision of finance to projects is concentrated in few individuals and firm shocks are idiosyncratic, the risk premium is likely to rise with the amount of funds firms demand. As a consequence, keeping constant the level of opacity and risk, firms with better growth opportunities face higher costs of external finance in countries where the financial system does not favor risk sharing; this limits firm size. Empirical evidence is also provided. Financial constraints appear more stringent for firms whose optimal size is larger in countries where the financial system is less developed.

Keywords: risk sharing; firm size; financial constraints; financial development

JEL-codes: G30; O16

37 pages, First version: November 1, 2001. Revised: November 6, 2001.

Full text files

hastef0472.pdf  Full text

Download statistics

• Stockholm School of Economics
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:hastef:0472This page generated on 2024-09-13 22:19:41.