Publication: Financial Development and Dynamic Investment Behavior : Evidence from Panel Vector Autoregression
Loading...
Published
2002-10
ISSN
Date
2014-08-01
Author(s)
Editor(s)
Abstract
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.
Link to Data Set
Citation
“Love, Inessa; Zicchino, Lea. 2002. Financial Development and Dynamic Investment Behavior : Evidence from Panel Vector Autoregression. Policy Research Working Paper;No. 2913. © http://hdl.handle.net/10986/19216 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Publication The Economic Value of Weather Forecasts: A Quantitative Systematic Literature Review(Washington, DC: World Bank, 2025-09-10)This study systematically reviews the literature that quantifies the economic benefits of weather observations and forecasts in four weather-dependent economic sectors: agriculture, energy, transport, and disaster-risk management. The review covers 175 peer-reviewed journal articles and 15 policy reports. Findings show that the literature is concentrated in high-income countries and most studies use theoretical models, followed by observational and then experimental research designs. Forecast horizons studied, meteorological variables and services, and monetization techniques vary markedly by sector. Estimated benefits even within specific subsectors span several orders of magnitude and broad uncertainty ranges. An econometric meta-analysis suggests that theoretical studies and studies in richer countries tend to report significantly larger values. Barriers that hinder value realization are identified on both the provider and user sides, with inadequate relevance, weak dissemination, and limited ability to act recurring across sectors. Policy reports rely heavily on back-of-the-envelope or recursive benefit-transfer estimates, rather than on the methods and results of the peer-reviewed literature, revealing a science-to-policy gap. These findings suggest substantial socioeconomic potential of hydrometeorological services around the world, but also knowledge gaps that require more valuation studies focusing on low- and middle-income countries, addressing provider- and user-side barriers and employing rigorous empirical valuation methods to complement and validate theoretical models.Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication Labor Demand in the Age of Generative AI: Early Evidence from the U.S. Job Posting Data(Washington, DC: World Bank, 2025-11-18)This paper examines the causal impact of generative artificial intelligence on U.S. labor demand using online job posting data. Exploiting ChatGPT’s release in November 2022 as an exogenous shock, the paper applies difference-in-differences and event study designs to estimate the job displacement effects of generative artificial intelligence. The identification strategy compares labor demand for occupations with high versus low artificial intelligence substitution vulnerability following ChatGPT’s launch, conditioning on similar generative artificial intelligence exposure levels to isolate substitution effects from complementary uses. The analysis uses 285 million job postings collected by Lightcast from the first quarter of 2018 to the second quarter of 2025Q2. The findings show that the number of postings for occupations with above-median artificial intelligence substitution scores fell by an average of 12 percent relative to those with below-median scores. The effect increased from 6 percent in the first year after the launch to 18 percent by the third year. Losses were particularly acute for entry-level positions that require neither advanced degrees (18 percent) nor extensive experience (20 percent), as well as those in administrative support (40 percent) and professional services (30 percent). Although generative artificial intelligence generates new occupations and enhances productivity, which may increase labor demand, early evidence suggests that some occupations may be less likely to be complemented by generative artificial intelligence than others.Publication The Lasting Effects of Working while in School(Washington, DC: World Bank, 2025-08-18)This paper provides the first experimental evidence on the long-term effects of work-study programs, leveraging a randomized lottery design from a national program in Uruguay. Participation leads to a persistent 11 percent increase in formal labor earnings, observable seven years after the program. Effects are stronger for youth who participate during pivotal educational transitions and are larger for vulnerable youth and men, while remaining positive for women and non-vulnerable youth. The program is highly cost-effective, with average impacts exceeding those of job training programs and comparable to early childhood investments.Publication It’s Not (Just) the Tariffs: Rethinking Non-Tariff Measures in a Fragmented Global Economy(Washington, DC: World Bank, 2025-10-22)As tariffs have declined, non-tariff measures (NTMs) have become central to trade policy, especially in high-income countries and regulated sectors like food and green technologies. Although NTMs may serve legitimate goals, they could also sort countries and firms into or out of markets based on compliance capacity and differences in product mix. Documenting recent advances in the estimation of ad valorem equivalents (AVEs), this paper uncovers new patterns of use and exposure of NTMs. High-income countries rely more heavily on NTMs relative to tariffs, while low- and middle-income countries face steeper AVEs on their exports. Firm-level evidence shows that NTMs disproportionately affect smaller firms, leading to market exit and concentration. Poorly designed NTMs can harm productivity and welfare, while coordinated, capacity-aware use can deliver inclusive outcomes. Policy design, transparency, and diagnostics must evolve to reflect the growing role—and risks—of NTMs in a fragmented global trade landscape.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Global Capital Flows and Financing Constraints(World Bank, Washington, DC, 2002-02)Firms often cite financing constraints as one of their primary obstacles to investment. Global capital flows, by bringing in scarce capital, may ease the financing constraints of host country firms. But if incoming foreign investors borrow heavily from domestic banks, foreign direct investment may exacerbate financing constraints by crowding host country firms out of domestic capital markets. Combining a unique cross-country firm-level panel with time-series data on restrictions on international transactions and capital flows, Harrison, Love, and McMillan find that different measures of global flows are associated with a reduction in firm-level financing constraints. First, the authors show that one type of capital inflow-foreign direct investment-is associated with a reduction in financing constraints. Second, they test whether restrictions on international transactions affects the financing constraints of firms. The results suggest that only one type of restriction-those on capital account transactions-negatively affects firms' financing constraints. The authors also show that multinational firms are not financially constrained and do not appear to be sensitive to the level of foreign direct investment. This implies that foreign direct investment eases financing constraints for non-multinational firms. Finally, the authors show that (1) foreign direct investment only eases financing constraints in the non-G7 countries, and (2) other kinds of flows, such as portfolio investment, have no impact on financing constraints.Publication Growth Volatility in Paraguay : Sources, Effects, and Options, Volume 2. Supplementary Volume with Selected Background Papers(Washington, DC, 2013-12-20)This supplementary volume of the study on Growth Volatility in Paraguay—Sources, Effects, and Options provides a number of background papers and material that was prepared as part of this study. The topics are closely linked with the overarching story telling presented in the first volume of the report. 1) Business Cycles Accounting for Paraguay, by Viktoria Hnatkovska and Friederike (Fritzi) Koehler-Geib. 2) Agricultural Performance and Macroeconomic Outcomes in Paraguay, by Hakan Berument. 3) Paraguayan Agricultural and Macroeconomic Performance: A Wavelet Approach, by Hakan Berument. 4) A study of the Volatility of the Agricultural GDP in Paraguay and its impact in the Rest of the Economy, by Dionisio Borda, Franchesco Anichini, and Julio Ramirez.Publication Creating a More Efficient Financial System : Challenges for Bangladesh(World Bank, Washington, DC, 2006-06)While Bangladesh has embarked on a path to reform its financial system, most prominently by privatizing its government-owned banks, the Nationalized Commercial Banks (NCBs), a sustainable long-term expansion of the financial system requires a more substantial change in the role of government. Using recent research and international comparisons, this paper argues that the government should move from its role as an operator and arbiter in the financial system to a facilitator role. This implies not only divestment from government-owned banks, but also de-politicization of the licensing process and a market-based bank failure resolution framework that focuses on intermediation and not on the rescue of individual institutions. Most important, the government should move away from the implicit guarantee for depositors and owners to applying the existing limited explicit deposit insurance for depositors, while simultaneously relying more on market participants to monitor and discipline banks instead of micro-managing financial institutions. This redefinition of government's role should not be limited to the banking system, but applies to other segments of the financial system, such as capital markets and the micro-finance sector, and should be seen as an essential element in the governance reform agenda and in the movement from a relationship-based economy to a market and arms-length economy.Publication Finance and inequality : Theory and evidence(2009-06-01)This paper critically reviews the literature on finance and inequality, highlighting substantive gaps in the literature. Finance plays a crucial role in most theories of persistent inequality. Unsurprisingly, therefore, economic theory provides a rich set of predictions concerning both the impact of finance on inequality and about the relevant mechanisms. Although subject to ample qualifications, the bulk of empirical research suggests that improvements in financial contracts, markets, and intermediaries expand economic opportunities and reduce inequality. Yet, there is a shortage of theoretical and empirical research on the potentially enormous impact of formal financial sector policies, such as bank regulations and securities law, on persistent inequality. Furthermore, there is no conceptual framework for considering the joint and endogenous evolution of finance, inequality, and economic growth.Publication Financial Development and Financing Constraints : International Evidence from the Structural Investment Model(World Bank, Washington, DC, 2001-10)The relationship between the financial, and real sides of the economy has long been a topic of intense interest, and debate. The author provides microeconomic evidence that financial development aids growth, by reducing financing constraints that would otherwise restrict efficient firm investment. The author estimates a structural model, based on the Euler equation for investment, using firm-level data from forty countries. The results show a strong negative relationship between the extent of financial market development, and the sensitivity of investment, to the availability of internal funds (a proxy for financing constraints). Considering size effects, business cycles, and the legal environment as plausible alternative explanations, the author finds the results to be robust in all cases.
Users also downloaded
Showing related downloaded files
Publication Argentina Country Climate and Development Report(World Bank, Washington, DC, 2022-11)The Argentina Country Climate and Development Report (CCDR) explores opportunities and identifies trade-offs for aligning Argentina’s growth and poverty reduction policies with its commitments on, and its ability to withstand, climate change. It assesses how the country can: reduce its vulnerability to climate shocks through targeted public and private investments and adequation of social protection. The report also shows how Argentina can seize the benefits of a global decarbonization path to sustain a more robust economic growth through further development of Argentina’s potential for renewable energy, energy efficiency actions, the lithium value chain, as well as climate-smart agriculture (and land use) options. Given Argentina’s context, this CCDR focuses on win-win policies and investments, which have large co-benefits or can contribute to raising the country’s growth while helping to adapt the economy, also considering how human capital actions can accompany a just transition.Publication Classroom Assessment to Support Foundational Literacy(Washington, DC: World Bank, 2025-03-21)This document focuses primarily on how classroom assessment activities can measure students’ literacy skills as they progress along a learning trajectory towards reading fluently and with comprehension by the end of primary school grades. The document addresses considerations regarding the design and implementation of early grade reading classroom assessment, provides examples of assessment activities from a variety of countries and contexts, and discusses the importance of incorporating classroom assessment practices into teacher training and professional development opportunities for teachers. The structure of the document is as follows. The first section presents definitions and addresses basic questions on classroom assessment. Section 2 covers the intersection between assessment and early grade reading by discussing how learning assessment can measure early grade reading skills following the reading learning trajectory. Section 3 compares some of the most common early grade literacy assessment tools with respect to the early grade reading skills and developmental phases. Section 4 of the document addresses teacher training considerations in developing, scoring, and using early grade reading assessment. Additional issues in assessing reading skills in the classroom and using assessment results to improve teaching and learning are reviewed in section 5. Throughout the document, country cases are presented to demonstrate how assessment activities can be implemented in the classroom in different contexts.Publication Lebanon Economic Monitor, Fall 2022(Washington, DC, 2022-11)The economy continues to contract, albeit at a somewhat slower pace. Public finances improved in 2021, but only because spending collapsed faster than revenue generation. Testament to the continued atrophy of Lebanon’s economy, the Lebanese Pound continues to depreciate sharply. The sharp deterioration in the currency continues to drive surging inflation, in triple digits since July 2020, impacting the poor and vulnerable the most. An unprecedented institutional vacuum will likely further delay any agreement on crisis resolution and much needed reforms; this includes prior actions as part of the April 2022 International Monetary Fund (IMF) staff-level agreement (SLA). Divergent views among key stakeholders on how to distribute the financial losses remains the main bottleneck for reaching an agreement on a comprehensive reform agenda. Lebanon needs to urgently adopt a domestic, equitable, and comprehensive solution that is predicated on: (i) addressing upfront the balance sheet impairments, (ii) restoring liquidity, and (iii) adhering to sound global practices of bail-in solutions based on a hierarchy of creditors (starting with banks’ shareholders) that protects small depositors.Publication Digital Africa(Washington, DC: World Bank, 2023-03-13)All African countries need better and more jobs for their growing populations. "Digital Africa: Technological Transformation for Jobs" shows that broader use of productivity-enhancing, digital technologies by enterprises and households is imperative to generate such jobs, including for lower-skilled people. At the same time, it can support not only countries’ short-term objective of postpandemic economic recovery but also their vision of economic transformation with more inclusive growth. These outcomes are not automatic, however. Mobile internet availability has increased throughout the continent in recent years, but Africa’s uptake gap is the highest in the world. Areas with at least 3G mobile internet service now cover 84 percent of Africa’s population, but only 22 percent uses such services. And the average African business lags in the use of smartphones and computers as well as more sophisticated digital technologies that catalyze further productivity gains. Two issues explain the usage gap: affordability of these new technologies and willingness to use them. For the 40 percent of Africans below the extreme poverty line, mobile data plans alone would cost one-third of their incomes—in addition to the price of access devices, apps, and electricity. Data plans for small- and medium-size businesses are also more expensive than in other regions. Moreover, shortcomings in the quality of internet services—and in the supply of attractive, skills-appropriate apps that promote entrepreneurship and raise earnings—dampen people’s willingness to use them. For those countries already using these technologies, the development payoffs are significant. New empirical studies for this report add to the rapidly growing evidence that mobile internet availability directly raises enterprise productivity, increases jobs, and reduces poverty throughout Africa. To realize these and other benefits more widely, Africa’s countries must implement complementary and mutually reinforcing policies to strengthen both consumers’ ability to pay and willingness to use digital technologies. These interventions must prioritize productive use to generate large numbers of inclusive jobs in a region poised to benefit from a massive, youthful workforce—one projected to become the world’s largest by the end of this century.Publication World Development Report 2006(Washington, DC, 2005)This year’s Word Development Report (WDR), the twenty-eighth, looks at the role of equity in the development process. It defines equity in terms of two basic principles. The first is equal opportunities: that a person’s chances in life should be determined by his or her talents and efforts, rather than by pre-determined circumstances such as race, gender, social or family background. The second principle is the avoidance of extreme deprivation in outcomes, particularly in health, education and consumption levels. This principle thus includes the objective of poverty reduction. The report’s main message is that, in the long run, the pursuit of equity and the pursuit of economic prosperity are complementary. In addition to detailed chapters exploring these and related issues, the Report contains selected data from the World Development Indicators 2005‹an appendix of economic and social data for over 200 countries. This Report offers practical insights for policymakers, executives, scholars, and all those with an interest in economic development.